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    A N N U A L REPO RT A N D A CCOUN TS 1 9 9 7 97

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    Den norske stats oljeselskap a.s - Statoil - w as founded in 1972. All its shares are ow ned by the Norw egian state. The company’s object is, either by itself or through partic- ipation in or together w ith other companies, to carry out exploration, production, transportation, refining and marketing of petroleum and petroleum-derived products, as w ell as other business. Net operating revenue for the group in 1997 totalled NOK 125 billion. At 31 December, it had the equivalent of 17 000 full-time employees. Statoil is the leading player on the Norw egian continental shelf, and has undertaken a gradual expansion of its international upstream operations in recent years. The group is one of the w orld’s largest net sellers of crude oil, and a substantial supplier of natural gas to Europe. Statoil ranks as the biggest retailer of petrol and other oil products in Scandinavia. It has a 50 per cent interest in the Borealis petrochemicals group and ow ns 80 per cent of the Navion shipping company. Statoil is responsible for managing the state’s direct financial interest (SDFI) in partnerships engaged in exploration for as w ell as development, production and transport of oil and gas on the Norw egian continental shelf. Statoil operates in the follow ing countries: Norw ay, Sw eden, Denmark, Germany, Poland, Estonia, Latvia, Lithuania, UK, Ireland, Belgium, France, Russia, Thailand, Vietnam, M alaysia, Singapore, Azerbaijan, Kazakstan, Angola, Namibia, Nigeria, USA, Australia, China, Venezuela and Brazil.

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    FI N A N CI A L H I G H LI G H T S 20 25 35 30 20 15 25 15 20 10 10 15 5 10 5 5 0 0 0 1993 1994 1995 1996 1997 1993 1994 1995 1996 1997 1993 1994 1995 1996 1997 O PERATI NG PRO FIT INVESTM ENTS AND ACQUISITIO NS BEFO RE- TAX RETURN O N CA PI TAL EM PLOYED NET PROFIT CASH FLOW FRO M OPERATI O N S A FTER- TAX RETURN O N CA PI TAL EM PLO YED (NOK m i ll io n ) 1997 1996 1995 1994 1993 O per at i n g re v e n u e 124 726 10 6 981 86 517 84 0 70 81 340 Op er at i n g p ro f i t 17 042 18 23 4 13 590 14 741 12 712 Pr o f i t b ef o re t axa t io n 13 989 1 7 924 14 689 16 9 00 11 98 0 N et p r o f i t 4 311 5 281 5 265 5 3 79 3 394 EQU ITY RAT I O 29.6% (NOK m i ll io n ) 1997 1996 1995 1994 1993 N et i n vest m en t s an d a cq u isi t io n s 19 66 7 1 1 910 16 938 10 6 83 13 30 6 N et be f or e-t ax cash f l ow f ro m o p er at i o n s 23 275 2 7 860 21 645 23 3 80 19 93 8 Ca sh f l o w f r o m o p e rat i on s 10 65 6 19 638 12 934 15 736 12 590 1993 I n t e r est -b e ar i ng d eb t 29 522 2 3 883 22 951 17 7 90 23 81 4 31.6% Sh a re h o l d e r ’s e q u it y 38 478 3 7 142 33 832 30 2 15 26 50 7 1997 1996 1995 1994 1993 1994 Be f o r e -t ax re t u r n o n cap i t al em p lo yed 27.1% 32.2% 27.1% 30.7% 28.3% A f t e r -t ax re t u r n o n cap i t al e m pl o yed 8.6% 9.6% 9.9% 10.4% 7.8% 31.1% Re t u r n on eq u i t y 11.2% 14.9% 16.4% 19.0% 13.4% Eq u it y rat io 32.4% 32.5% 31.1% 31.6% 29.6% 1995 1997 1996 1995 1994 1993 Exp lo r a t i o n exp en d i t u re ( NOK m i l li o n ) 3 473 1 644 1 297 1 4 75 1 702 32.5% Oi l p r o du ct io n , in t h o u san d s o f b b l s/d 411 464 424 449 414 Sal es o f eq u i t y gas p e r d a y (m i ll i o n cu .m ) 22.1 19.6 12.3 11.8 10.4 Re f i n e r y t h ro u g h p u t , i n t h ou san d s o f b b l s/ d 273 250 216 224 225 1996 Oi l r e se rves, in m il li on s o f b ar r el s (i n cl NGL) 2 051 1 899 1 853 1 9 09 1 870 Gas r e se r ves, in b i l l i o n s o f cu b ic m et r e s 366 337 324 330 340 32.4% Q U O TED O I L PRICE - BREN T BLEND 25 1997 20 15 10 1993 1994 1995 1996 1997

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    FI N A N CI A L H I G H LI G H T S D EFI N I T I O N S: Capit al employed: Tot al asset s less non-int erest OIL RESERVES GAS RESERVES bearing debt Bef ore-t ax ret urn on capit al employed: NORW AY NORW AY Prof it bef ore t ax plus borrow - ing cost s as a percent age of average capit al employed Af t er-t ax ret urn on capit al UK employed: Net prof it plus borrow ing AZERBAIJAN UK OTHERS ANGOLA OTHERS USA cost s af t er t ax as a percent - CHINA VENEZUELA VIETNAM THAILAND age of average capit al DENM ARK employed Ret urn on equit y: Net prof it including minorit y RESERVES PRODUCTION int erest s as a percent age of M ILLION BARRELS 1000 BBLS/ DAY average shareholder’s equit y 2000 800 Equit y rat io: 700 Shareholder’s equit y includ- 1500 600 ing minorit y int erest s as a 500 percent age of t ot al balance 1000 400 less account s payable relat ed 300 500 200 t o t he st at e’s direct f inancial 100 int erest (SDFI) in t he pet ro- 0 0 leum indust ry, see page 64 1993 1994 1995 1996 1997 OIL PRODUCTION OIL RESERVES Net bef ore-t ax cash f low f rom operat ion: Cash receipt s f rom and cash disbursement s t o operat ions RESERVES SALES less net f inancial disburse- ment s BILLION CU.M M ILLION CU.M / DAY 400 30 Cash f low f rom operat ions: Cash receipt s f rom and cash 25 300 disbursement s t o operat ions 20 less net f inancial disburse- 200 15 ment s less t axes paid 10 100 5 Reserves: 0 0 Proved, commercially 1993 1994 1995 1996 1997 recoverable reserves SALES OF EQUITY GAS GAS RESERVES 17042 4311 operating profit (NOK m) net profit (NOK m) STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 3

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    S BI G O I L FI ELD G ET S BI G G ER t at f jord has been on st ream f or almost 20 years. Since t he A plat f orm began f low ing on 24 November 1979, t his f ield’s t hree product ion inst allat ions have yielded 3.5 billion barrels of oil. Syst emat ic ef f ort s t o monit or reservoir development s in order t o improve underst anding of sub-surf ace condit ions allow ed St at oil as operat or t o upgrade recoverable reserves in 1997 f rom 3.9 t o 4.1 billion barrels out of 6.3 billion barrels of st ock t ank oil originally in place. This corresponds t o a recovery f act or of 65 per cent , and 70 per cent is regarded as w it hin realist ic reach. Development of a mult idimensional comput er pro- gramme has been an import ant t ool in enhancing reser- voir underst anding. This sof t w are has made it possible t o ident if y 94 opport unit ies f or new w ells. A t ot al of 190 w ells have been drilled on St at f jord so f ar. St at oil’s goal is t o cont inue producing oil f rom t he f ield beyond 2020. Drilling of new product ion w ells and increased use of gas inject ion w ill make t he most impor- t ant cont ribut ions t o reaching t his ambit ious goal. From 2000, one alt ernat ive is t o use all gas product ion f rom St at f jord f or pressure support . This amount s t o 33 million cubic met res per day, and sales commit ment s f or St at f jord gas could be met by supplies f rom ot her Norw egian f ields. Once oil product ion on St at f jord is approaching it s end, t he inject ed gas can be recovered. The mult idimensional comput er programme w ill also be adopt ed on ot her f ields operat ed by St at oil. Similar equipment has already been ordered f or Heidrun, and t he use of corresponding t ools is under considerat ion by t he Gullf aks licence. 5

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    CO M M EN T S BY T H E CH I EF EX ECU T I V E CHIEF EXECUTIVE HARALD NORVIK (RIGHT) AND CHAIRM AN KJELL KRAN INSPECT ONE OF THE OLD OIL FIELDS IN BAKU DURING A VISIT BY THE BOARD OF DIRECTORS TO AZERBAIJAN IN AUTUM N 1997. T welve people lost their lives on 8 September 1997 when a helicopter crashed on its way to Statoil’s Norne production ship. The accident was a blow to the whole organisation. Our thoughts go to the bereaved, to the families and friends who lost their loved ones. This tragic incident provides a serious reminder of how important it is to maintain a strong focus on safety in our industry. Although great efforts have been devoted to reducing accidents and injuries, safety results for 1997 are not good enough. They must and will get better. This is my responsibility, and a responsibility for every employee in Statoil. Oil exploration is expensive and risky. In 1997, we were obliged to write off an investment of NOK 1.2 billion because the Connemara field of f Ireland proved unproducible. That means we’ve experienced the extremes between exploration success and dis- appointment. The lesson of Connemara is that our risk assessments must improve even further. The group’s oil and gas reserves rose by eight per cent in 1997. Our international reserves expanded from eight to 16 per cent of the total, a substantial increase which O IL A N D GA S lays the basis for value cre- RESERV ES ation. Our goal I N CREA SED is that Statoil’s net equity pro- duction will be a million barrels of oil equivalent per day in 2005. That represents almost a doubling from today’s level. A third of this output will come from our projects outside Norway. The additional reserves proved in 1997 bring us closer to this goal. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 6

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    We initiated production from our own produc- reforming countries of eastern Europe. Statoil has tion ship on the Lufeng field off China in 1997. worked purposefully on climate challenges for a Azeri-Chirag, in which we have an 8.56 per cent number of years. Our own emissions per unit pro- interest, began producing in the Caspian. We partici- duced have been sharply reduced. We feel that pate in major oil discoveries off Angola. The group industry itself must play an active role in efforts to is well established in Venezuela. We have secured a limit greenhouse gas emissions, and we want to col- substantial exploration portfolio in the Gulf of laborate with the authorities, competent industrial Mexico, and have started work in this area from our companies and research environments to develop recently-established exploration office in Houston. and implement cost-effective solutions. Our Eastern Group subsidiary has developed a visi- Statoil’s principal objective is to create financial ble position in the north-eastern USA’s energy mar- results on the basis of the resources we manage and ket. We secured operatorships for five licences and the industrial operations we pursue in a number of interests in another four from Britain’s 17th offshore areas. We acknowledge that our 1997 results, viewed licensing round. And we can look back on the first overall, are weaker than expected. Delivering better full year of operation as sole owner of the Alliance results in coming years will be one of the group’s Gas marketing company in the UK. principal challenges. Good profitability is essential Off Norway, we have begun production from the in creating a good foundation for long-term value Norne field. This project provides practical evidence creation. that the ambitious goals we have set for cost reduc- Statoil is pri- tions and rapid project execution are attainable. marily a knowl- EX PERT I SE Our principal markets are characterised by growth, edge-based com- AND but also by change. General terms are being pany. We work A D A PTA T I O N affected and competition is getting sharper. As a every day to result, I expect a stronger restructuring in our adapt the whole industry. I see opportunities for strengthening our organisation to fresh challenges. In 1997, we once position in several of the group’s key areas. again pushed back previous limits. On Statfjord We sold 2.1 million barrels of oil and large alone, we upgraded recoverable reserves so that we volumes of gas every day in 1997. That makes us and the other licensees can take out an additional one of the world’s biggest players in the oil market. gain of about NOK 25 billion. We have implemented We’re satisfied that Statoil is the preferred supplier a number of successful projects in close collabora- for many customers, and will be working to tion with other oil companies and suppliers. We have maintain and strengthen that position. adopted new technological solutions which will help Statoil is an important supplier of natural gas to to provide the market with better and cheaper prod- Europe. We have a principal responsibility for the ucts, and which will also increase our efficiency and production facilities and transport systems which earnings. carry gas from Norway’s offshore fields to the We will be drawing on these experiences in our European continent. Norwegian gas sellers are com- on-going efforts to achieve ambitious goals for mitted to delivering 75 billion cubic metres of gas increased safety in all operations, a stronger footing per year from 2005. Statoil will account for roughly on the Norwegian continental shelf, continued inter- 15 per cent of these deliveries. The European national growth and improved customer relations. Union’s gas directive presents us with new chal- The results will be good competitiveness and lenges and interesting commercial opportunities in high value creation. the European gas market. Interest in buying more gas from Norway remains high. This will call for major and bold decisions by both sellers and buyers. Reliable delivery, cost-effective production and transport and flexibility in relation to market requirements will be our most important considera- tions. In 1997, the UN conference in Kyoto gave us the Harald Norvik first binding protocol for reducing greenhouse gas President and chairman emissions in industrialised countries and in the of the executive board STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 7

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    REPO RT O F T H E BO A RD O F D I RECT O RS 1 . I N T RO D U CT I O N The Statoil group achieved an operating profit of NOK 17 billion for 1997, which is slightly down from the year before. Profit before tax came to NOK 14 billion as against NOK 17.9 billion in 1996. Net profit for the year amounted to NOK 4.3 billion compared with NOK 5.3 billion in 1996. Return on capital employed after tax came to 8.6 per cent as against 9.6 per cent the previous year. Certain factors had a particular influence on results for the year: • lower oil production • good operation and high regularity of production installations and transport systems • a marked expansion in exploration operations • good results for refining, petrochemicals and shipping • write-downs associated with the acquisition of oil company Aran • weak results from retailing in Scandinavia • a weaker financial result owing to the higher USD exchange rate against the NOK. Acquiring Aran two years ago has not yielded the results expected by Statoil because production proper- ties for Connemara off Ireland failed to live up to expectations. Work on a development of this field was halted and NOK 1.2 billion in costs for the project were charged against income. Statoil has made a thorough review of the Connemara project in order to draw the maximum organisational lessons from it. This applies particu- larly to risk assessment, application of best practice and cooperation with partners. The tragic helicopter crash near Norne in September, which cost the lives of 12 people, showed will full clarity that safety efforts in our operations must always be given the highest priority. Investment and exploration efforts by the Statoil group expanded substantially in 1997. Finding, acquiring and maturing additional resources increased overall oil and gas reserves by eight per cent. This will strengthen long-term earnings. Statoil continued developing its business during 1997 to strengthen future earnings. Shipping operations Kjell O Kran, born in 1937, is chief execut ive of Sparebanken were demerged into the new Navion company, established together with a partner. Service stations in NOR. He received an economics degree f rom t he Universit y of Germany were sold. Statoil bought, sold or swapped interests in 21 licences off Norway and the UK. These St Gallen in 1963. M r Kran has transactions were made to adapt the business to changed market conditions and to concentrate resources on been chairman of t he St at oil board since 1996. the exploration side. This will strengthen the group’s position in selected core areas of the north-west European continental shelf. The swap agreements led to a slight reduction in supplies of entitlement oil for 1997. But this will be offset by an improvement in the group’s long-term production profile and competitive- ness. Work on improving the cost efficiency of operations yielded good results in 1997. The board nevertheless notes that the group’s results and return on capital for the year were unsatisfactory. Measures initiated to bal- ance the group’s long-term growth and short-term earnings must continue to receive high priority. 2 . PRO D U CT I O N , T RA N SPO RT A N D D EV ELO PM EN T H e a l t h , t h e e n v i r o n m e n t a n d sa f e t y The helicopter crash which cost the lives of 12 people is the most serious accident to strike Statoil as operator. In cooperation with the helicopter company, partners and the authorities, the group has carefully reviewed all aspects of the accident with a view to reducing the risk of helicopter transport even further. A good working environment and a focus on safety and the environment are crucial for the group’s value creation and positions. Health, environmental and safety conditions are regularly monitored to provide a basis Ellen M o, born in 1951, is a part- for Statoil’s continuous improvement efforts. The board is giving attention to this work, and notes that the ner in Oslo’s Hauge & Co law firm. She received a law degree group occupies a leading position in these areas. Systematic efforts have yielded results in several areas. from the University of Oslo in 1976, and is qualified to plead Nevertheless, the first increase for many years in the number of lost-time injuries was recorded in 1997. cases in the Supreme Court. M s M o has served as deputy chair- Measures instituted by Statoil and its suppliers to achieve the goal of zero lost-time injuries will be monitored man of the Statoil board since by the board. 1997. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 9

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    REPORT OF THE BOARD OF DIRECTORS The board regards the Kyoto agreement, seen in relation to the precautionary principle, as necessary and important. Statoil has initiated measures to meet the challenges posed by this protocol, and has set the ambitious target of reducing car- bon dioxide emissions by 30 per cent over 10 years. The board believes that the aggressive environmental efforts now under way are necessary and will strengthen Statoil’s commercial position. Pr o d u ct i o n a n d p i p e l i n e t r a n sp o r t Statoil’s average daily supplies of entitlement oil contracted from 464 000 barrels in Bjørn E Egeland, born in 1943, is logist ics supervisor on t he 1996 to 411 000 barrels. This partly reflected declining production from the major Gullf aks C plat f orm. He has represent ed t he employees on Statfjord, Gullfaks and Oseberg fields. The group also swapped interests in produc- t he St at oil board since 1996. ing fields for holdings in discoveries which will begin production at a later date. These swaps represent a short-term reduction of 30 000 barrels in Statoil’s average daily output. Production from Norway’s large offshore gas fields is set to expand to fulfil the country’s major gas sales agreements. This will also increase Statoil’s gas sales. The gro up’s co mmitment to impro ving reco ver y fro m pro ducing fields is co ntinuing to yield go o d results. Reco ver y facto rs have risen significantly o n a number o f o il fields, extending their pro ducing life. A reco ver y facto r as high as 70 per cent may be achieved o n Statfjo rd. This has been made po ssible by system- atic efforts to develo p and apply new techno lo gy fo r seismic sur veying, reser vo ir mo delling and drilling. The bo ard is ver y satisfied with Stato il’s co ntributio n in this way to enhancing value creatio n fo r the gro up, its part- ners and its o wner. RECO V ERY Good regularity has been achieved in production and the transport sys- FA CT O R U P tems. The Zeepipe IIB gas trunkline, which runs from Kollsnes to the Draupner hub in the North Sea, began regular operation on 1 October. Norne came on stream in autumn 1997. In a number of respects, this field represents a pioneering project. Development costs are several billion kroner lower than they would have been with traditional solutions. Standardised subsea technology and effective project execution were crucial to this good result. Norne is the first Norwegian field to make permanent use of a production ship. Production costs per barrel of oil produced are among the lowest for offshore operations in the international petroleum indus- try. Norne was shut in on 1 February 1998 because its oil spill clean-up equipment proved unsatisfactory at handling the highly viscous crude produced from this field. Extensive efforts were initiated by Statoil and sup- pliers to improve this equipment. The Lufeng field on the Chinese continental shelf began producing in late 1997. Cost-effective solutions make this discovery commercial even though it is expected to remain on stream for only three-four years. Multipurpose shuttle tanker Navion Munin is being utilised in production mode, and extensive use has been Tormod Hermansen, born in made of other Statoil-developed technology in developing Lufeng. 1940, is chief execut ive of Production from Azeri-Chirag in the Caspian started in October as the first stage in a joint development of Telenor. He has an economics degree f rom t he Universit y of these two fields and the deepwater section of the Gunashli discovery off Azerbaijan. Statoil participates in the Oslo. M r Hermansen became a direct or of St at oil in 1991. operator, Azerbaijan International Operating Company ( AIOC) . Development Exploration and development costs rose during 1997, owing to the high level of activity in the industry. Rig rates rose sharply over a short period as a result of heavy demand and limited newbuilding in recent years. Engineering and fabrication costs have also risen recently. However, Norway’s Norsok programme and Statoil’s own BRU project for better and faster development have helped to rein in the level of costs and shorten execution times. Maintaining the strengthened competitive position achieved by Norway’s offshore sector through these efforts will be important. In the board’s view, developing the Åsgard field and its associated land facilities at Kårstø is important for the group’s future value creation. Work at Kårstø has become significantly more extensive than originally planned, with several additional facilities. In addition, some cost components in the project were underesti- STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 10

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    REPORT OF THE BOARD OF DIRECTORS mated at the planning stage. The investment framework has been increased from NOK 2.6 billion to just over NOK 8 billion. Value creation and profitability remain satisfactory in the revised plans. I M PO RTA N T The Åsgard development makes extensive use of subsea systems and floating D EV ELO PM EN T S production installations. New technology is being adopted in a number of areas, par- ticularly to master demanding conditions of pressure and temperature. The Åsgard A production ship was delayed from the Japanese yard. As a result, production is expected to start in early 1999. Work on the NorFra trunkline system, which will deliver gas to France from autumn 1998, is on schedule. Laying the 840-kilometre line was completed in August, a month early, and within the established investment framework. 3 . O I L A N D G A S SA LES Ga s m a r k e t s Markets for Norwegian gas made positive progress in 1997. The Gas Negotiating Committee ( GFU) concluded long-term agreements with Italy’s Snam for six billion cubic metres per annum and with Czech company Transgas for three billion cubic metres per year. These contracts mean that overall Norwegian gas sales just after 2000 will reach an annual level of 75 billion cubic metres. Statoil has strengthened its position in the gas market over recent years by becoming sole owner of Alliance Gas in the UK and by acquiring America’s Blazer Energy through its Eastern Group subsidiary in the USA. In Norway, Statoil is working with Norsk Hydro and Statkraft through the Naturkraft company to build two gas-fired power stations. The Norwegian Pollution Control Authority has given permission to start construc- tion preparations, but an emission permit with associated terms will not be finalised until late 1998. Before a final decision can be taken, the profitability of the power stations must be clarified. Conditions set by the authorities will be crucial in this context. The board believes that gas-fired power stations represent an impor- tant business opportunity, both in Norway and internationally. Oil t rading, ref ining and market ing Statoil currently trades 2.1 million barrels of oil per day, including just over 1.5 million barrels from the state’s direct financial interest ( SDFI) and 0.4 million barrels as the group’s entitlement oil. In addition to its position in Europe, Statoil has developed market positions and contacts in the USA and south-east Asia to sell oil with good profitability. Shipping operations play an important role in the group’s marketing apparatus for crude oil and refined products. They have now been demerged into a separate subsidiary, Navion, owned 80 per cent by Statoil and 20 per cent by Rasmussen. Fleet utilisation and operations were very good in 1997, contributing to a good financial result. Navion has also developed new floating production systems which provide com- petitive advantages. One of the company’s multipurpose shuttle tankers is being used as the production ship on the Lufeng field off China, with another due to pro- duce Britain’s Pierce discovery. Refinery operations achieved a significant improvement in results during 1997 thanks to higher margins, good plant availability and improvements in cost effi- ciency. Completion of the Melaka refinery in Malaysia, owned 15 per cent by Statoil, is six months behind schedule. It is now due to come on line in the fourth quarter of 1998. Yngve Hågensen, born in 1938, is general secret ary of t he Competition in the Scandinavian petrol market has sharpened considerably over Norw egian Federat ion of Trade Unions. He became a direct or recent years. Reduced margins weakened results in this area. Action to improve of St at oil in 1990. profitability and earnings has been initiated. These measures are intended to reduce annual costs by more than NOK 400 million and downsize staffing by the equivalent of about 350 full-time jobs. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 11

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    REPORT OF THE BOARD OF DIRECTORS The development of Statoil’s service station network in the Baltic states and Poland is on course. Retail operations in Germany were sold during 1997 in order to concentrate on markets where the group can achieve adequate strength. Pe t r o ch e m i ca l s Operations at the Borealis petrochemicals group, owned 50 per cent by Statoil, yielded good results in 1997. This performance primarily reflected stable operation and increased demand for polyolefins in world markets. Finland’s Neste, the other owner of Borealis, has signed a letter of intent on selling its holding to Austrian oil company OMV and IPIC, the national investment company of Abu Dhabi. At the same time, Borealis has signed a letter of intent with OMV to acquire the PCD polyolefin company, which operates primarily in Austria and Germany. Production and sale of methanol from the Tjeldbergodden plant represents a further extension of the group’s operations. This facility came on stream in June 1997, two months behind schedule. Regularity has been good after the running-in period. 4 . PRO JECT S A N D N EW BU SI N ESS O PPO RT U N I T I ES Exploration operations for the year on the Norwegian continental shelf added 66 million barrels of oil and 11 billion cubic metres of gas to Statoil’s reserves. This I N T ERN A T I O N A L is the best discovery rate for several years, but the overall increase in reserves SH A RE O F from exploration alone nevertheless failed to offset the volume produced in 1997. RESERV ES U P Improved recovery factors for producing fields once again made major contribu- tions to the group’s reserves in 1997. Off Norway, Statoil increased its reserves from 349 million barrels of oil equivalent to 750 million barrels. The international share of group reserves thereby increased from eight to 16 per cent during the year. The Vestprosess company was established with Statoil as operator. It will construct and operate pipelines to carry natural gas liquids and condensate from the crude oil terminal at Sture and the Kollsnes gas treat- ment plant to the Mongstad refinery. Coordination with the existing facilities at Kollsnes and Sture will enhance value creation. At the same time, it lays the basis for further value added at the Mongstad refinery through an upgrading of its crude oil facilities. As operator, Statoil submitted plans for development and operation of the Huldra field in the North Sea and phase two of the Gullfaks satellites project. Work on commercialising reserves in the Snøhvit field is making progress. Estimated development costs for a land-based gas liquefaction plant have been substantially reduced through purposeful technology devel- opment. Efforts to clarify development solutions, transport options and markets even further will continue in 1998. Statoil is a partner in the Girassol field off Angola, currently under evaluation for development. Angola represents one of the group’s most promising assets for future international oil production. The group is also involved in further development of a large Venezuelan field. This country will be an important priority area for Statoil. A strong position is enjoyed by the group in Azerbaijan, opening opportunities for substantial long-term supplies of entitlement oil. Helge M idt t un, born in 1955, is president of St ent o ASA. He In addition, Statoil has secured new exploration acreage in the US Gulf of Mexico, on the UK continental received an economics degree f rom t he Norw egian School of shelf and in Kazakstan’s sector of the Caspian. Economics and Business Administ rat ion in Bergen in 1979. M r M idt t un became a 5 . O RG A N I SA T I O N A L D EV ELO PM EN T direct or of St at oil in 1997. A strongly-founded ethical base and shared attitudes are important elements in Statoil’s corporate culture. They are particularly important in the development of its international operations, where employees work in countries with demanding social conditions. The group gives weight to ensuring that respect for human rights forms part of the value system in all countries in which it operates. Organisational development, expertise enhancement and training are important tools for meeting tougher competition and quality requirements in Statoil’s markets. Great attention is paid to further strengthening its core technologies. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 12

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    REPORT OF THE BOARD OF DIRECTORS Applying information technology in effective ways is becoming an increasingly important competitive factor. During 1997, employees in Statoil were given the EX PERT I SE opportunity to have a PC at home in exchange for signing a training contract. AND Intended to enhance expertise on using IT, this has boosted learning and enthusi- asm in the organisation. ED U CA T I O N High productivity and low costs are fundamental to competitiveness in all the group’s markets. Through an in-house programme, Statoil has developed new administrative systems and work processes for the group. Implementation of this programme is now under way, and will yield more rational work processes and reduced costs. The Statoil group had 17 177 employees at 31 December 1997, as against 15 171 a year earlier. This figure includes 6 118 people employed in the group’s operations outside Norway. The increase reflects several fac- tors, including retailing growth in the Baltic states and Poland. Forecourt personnel in these countries are employed by the group. Acquiring Blazer Energy increased the US workforce. Statoil has continued the grad- ual expansion of its international upstream operations by recruiting local key personnel in a number of cate- gories. Higher activity on the Norwegian continental shelf has also increased staffing requirements. The labour market in the oil industry is tight, both in Norway and internationally, but Statoil has been successful in recruiting and retaining highly-qualified personnel. 6 . FI N A N CI A L D EV ELO PM EN T S Overall operating revenues for 1997 came to NOK 124 726 million. Operating profit was NOK 17 042 million as against NOK 18 234 million in 1996. Profit before tax was 13 989 million. Net profit came to NOK 4 311 million compared with NOK 5 281 million the year before. Iver Pehrson, born in 1940, is a Operating profit for exploration and production amounted to NOK 15 427 million as against NOK 16 854 st aff engineer in St at oil. He graduat ed as an engineer f rom million in 1996. Refining and marketing operations showed an operating profit of NOK 1 301 million, down by t he Norw egian Inst it ut e of NOK 367 million from the year before. Operating profit for petrochemicals rose by NOK 183 million to NOK Technology in Trondheim. M r Pehrson has represent ed 396 million. t he employees on t he St at oil board since 1994. Costs of NOK 1 200 million associated with the Connemara project in Ireland have been charged against income. The annual result includes gains of roughly NOK 900 million on the sale of part of the property portfolio to Statoil’s pension funds and on sales of licence interests. About NOK 400 million has been charged against operating profit in respect of current restructuring mea- sures in Scandinavian retailing and in Borealis. NOK 2 800 million in currency loss on the group’s debt arising from the increased USD/ NOK exchange rate is charged against the financial result. These losses are mostly unrealised. The average market price for Brent Blend, the North Sea reference crude, was NOK 135 ( USD 19.1) per barrel in 1997. This compares with NOK 133 ( USD 20.7) the year before. Margins for refining and petrochem- ical products rose from 1996 to 1997. Net capital investment by Statoil totalled NOK 19 667 million as against NOK 11 910 million in 1996, with 57 per cent of this spending made in Norway. The level of investment was high in 1997, reflecting several major projects on the Norwegian continental shelf, new multipurpose shuttle tankers, the acquisition of Blazer Energy in the USA and large expenditures on exploration and production off Norway. Fixed assets worth NOK 3 326 million were sold during the year. M aurit z Sahlin, born in 1935, w as chief execut ive of AB SKF Investment has been partly financed by cash flow from operations, which came to NOK 10 656 million in unt il 1995 and current ly holds a number of import ant direc- 1997 as against NOK 19 638 million the year before. This substantial decline primarily reflects higher tax pay- t orships. He has an engineer- ing degree f rom t he Royal ments than in 1996 and NOK 4 000 million in extraordinary repayment of debt to the state’s direct financial Universit y of Technology in interest. New long-term loans of NOK 8 762 million have been taken up by the group, which made NOK 2 242 St ockholm. M r Sahlin became a direct or of St at oil in 1996. million in loan repayments. Interest-bearing debt is largely denominated in US dollars, and totalled NOK 29 522 million at 31 December. The group’s long-term loans have an average maturity of seven years, and interest charges in 1997 averaged 5.4 per cent as against 6.2 per cent the year before. Statoil managed a portfolio of NOK 14 800 million in bonds and shares at 31 December. Seventy-four per cent of this amount is placed in the Norwegian securities market. Financial management by the group relates STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 13

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    REPORT OF THE BOARD OF DIRECTORS primarily to assets in Statoil Forsikring ( insurance) and in Statoil’s pension funds, which are not consolidated in the accounts. The average return on financial assets in 1997 was 14.4 per cent. In addition to its own equity interests, Statoil manages the state’s direct financial interest ( SDFI) in Norwegian oil and gas operations. Separate financial statements are kept by the group for the SDFI. Only the group’s own equity interests appear in the Statoil accounts. Information on remuneration paid to the chief executive and the governing bodies is provided in note 3 to the accounts for Den norske stats oljeselskap a.s. Accounts for the group prepared in accordance with Norwegian generally accepted accounting principles ( NGAAP) show an operating profit of NOK 16 439 million, down by NOK 2 094 million from 1996. A net profit of NOK 8 398 million was recorded by the parent company, Den norske stats oljeselskap a.s. This figure includes NOK 3 656 million in sales gain from the demerger of shipping operations to the Navion subsidiary. NOK 1 595 million written down on the shares in Statoil Investments Ireland has been charged to the accounts. These two items are eliminated in the group accounts. Dividend paid by Statoil in recent years has corresponded to about 30 per cent of the group’s net profit, helping to enhance its financial strength. The central government budget for 1997 put Statoil’s estimated divi- dend payment at NOK 2 940 million, equivalent to 68 per cent of its net profit. Statoil has indicated to its owner that a dividend approaching 50 per cent represents a good and competitive level for the future. The board Åse Simonsen, born in 1943, is would emphasise the importance of predictability in determining the level of dividend. In this context, the a senior account ing coordinat or in St at oil. She has an economics board considers a payment of NOK 2 940 million for 1997 to be high. The board anticipates that future divi- degree f rom t he Norw egian School of Economics and dend payments from Statoil will build on a long-term policy and be seen in relation to the group’s equity capital Business Administ rat ion in Bergen. M s Simonsen has repre- requirements. sent ed t he employees on t he The board recommends the following allocation of profit for 1997 in the parent company, Den norske stats St at oil board since 1990. oljeselskap a.s ( in NOK million) : Group contribution paid 516 Allocated to statutory reserve 2 450 Dividend 2 940 Allocated to distributable reserve 2 492 Net profit 8 398 7 . FU T U RE D EV ELO PM EN T S Results for the group in coming years will depend on developments in the oil market. The build-up in global production capacity is expected to continue. Forecast growth in demand is unlikely to alter fundamental mar- ket conditions. To safeguard Statoil’s competitiveness and earnings, it will accordingly be important to main- tain a sharp focus on cost-effective operation, development and commercial progress. Margins in refining and petrochemicals are expected to continue fluctuat- LO N G - T ERM ing. There is no reason to expect margins to reach a higher level in the fore- G O A LS REM A I N seeable future. Markets are characterised by matu- U N CH A N G ED rity and stiff competition. The same applies to retailing. The Norwegian continental shelf remains a highly interesting exploration area. Exploration operations in the blocks awarded in the 15th offshore licensing round have yielded encouraging results. The group’s knowledge and technological expertise provide a solid foundation for proving, developing and producing additional reserves in these areas. Statoil’s strategy for future value creation involves concentrating its interna- Gunn W ærst ed, born in 1955, is president of Vit al Forsikring. tional upstream operations in selected core assets. The Caspian, Angola, Venezuela, She gained a degree f rom t he Norw egian School of the US Gulf of Mexico and the UK continental shelf currently stand out as the most M anagement in 1979. relevant of these areas. M s W ærst ed became a direct or of St at oil in 1997. The European gas market will continue to expand. Reaching agreement with the British authorities on a new treaty for the Frigg transport systems opens oppor- STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 14

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    REPORT OF THE BOARD OF DIRECTORS tunities in the UK market. Market growth in continental Europe provide opportunities for increased gas sales. As chair of the Gas Negotiating Committee, Statoil is talking with several potential customers about additional gas volumes. In the event, these would have to be provided by developing new production capacity. At the same time, business opportunities are being opened for also following gas through to end users. The European Union’s gas directive and changes in Europe’s energy markets represent new challenges. New players are becoming involved in gas markets, and could contribute to structural changes. Transport capacity is also being developed from new production areas, such as Britain to continental Europe. These trends will alter and sharpen competition. Statoil’s goal is to increase its daily oil and gas production to a million barrels of oil equivalent by 2005, including at least 300 000 barrels from areas outside Norway. Attaining these objectives will be demanding. The board is maintaining its goal of NOK 25 billion in operating profit for 2000. A number of improvement efforts are under way within the group to meet this target. Capital investment and the build-up of reserves in recent years have laid the basis for substantial future earnings. The board notes that operations and develop- ment work by the group provide a good foundation for achieving the growth sought in results. STAVANGER, 18 FEBRUARY 1998 THE BOARD OF DIRECTORS OF DEN NORSKE STATS OLJESELSKAP A.S KJELL O KRAN ELLEN MO CHAIRMAN DEPUTY CHAIRMAN HELGE MIDTTUN GUNN WÆ RSTED IVER PEHRSON MAURITZ SAHLIN YNGVE HÅGENSEN ÅSE SIMONSEN TORMOD HERMANSEN BJØRN E EGELAND STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 15

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    N inet een-ninet y-seven can best be remembered as t he year w hen inf ormat ion t ech- nology came home t o t he individual St at oil employee w orld-w ide. The IT st ep aims t o f ulf il one of t he goals in Three st eps f orw ard t o a new I T ST E P millennium, St at oil’s int ernal programme t o pre- pare f or 2000 and beyond. An import ant part of t his commit ment involves enhancing employee I N T O T H E FU T U RE expert ise in ut ilising IT. In pract ice, t his means t hat everyone in t he group w as given t he opport unit y t o receive a home PC w it h an int ernet connect ion. The IT st ep had about 13 500 part icipant s at 31 December, including 10 300 in Norw ay alone. All have cont ract ed w it h t he group t o t ake part in an ext ensive t raining programme. St aff engineer Helge Joa in St avanger w as quick t o sign up f or t he IT st ep, t o t he benef it of his t hree sons - M ort en, Kjet il and Eirik - and his w if e Gunn Jane. The f amily spends t w o-t hree hours a day on t he home comput er, using it f or w ord processing, net brow sing and games. M r Joa says t he f ollow ing about his f amily’s experience w it h t he IT st ep: “Our boys put t he equipment t oget her, w hich only goes t o show t hat t he inst ruct ions included in t he package w orked w ell. The lads mainly use t he comput er f or school w ork, t o f ind inf orma- t ion and f or w ord processing. Personally, I f eel it ’s posit ive t o have t he chance t o learn at home. It can be dif f icult t o f ind t he t ime during t he w orking day t o get t o grips w it h all t he opport u- nit ies of f ered. Now Gunn Jane is also t hinking of moving int o t he digit al w orld.” Senior vice president Nina Udnes Tronst ad at Inf ormat ion Technology in St avanger says t hat t he IT st ep w as regarded w it h great expect at ion by employees. Experience so f ar show s t hat t hese expect at ions are being f ulf illed. She is con- vinced t hat t his w as an appropriat e and f or- w ard-looking commit ment . M ast ery of IT and t he abilit y t o see t he opport unit ies it of f ers w ill be a very import ant compet it ive f act or in years t o come, bot h f or t he group and f or t he individual employee. This t echnology opens t remendous opport unit ies f or sharing inf ormat ion and know ledge int ernally and ext ernally, and across f ormal organisat ional boundaries. The result w ill be t o enhance St at oil’s know -how , f lexibilit y and compet it iveness - and t hereby it s value creat ion. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS ‘ 9 7 16

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    STA T O I L’ S O PERA T I O N S was launched after the crash. Rescue work was TH E FO LLO W I N G FI V E PRI N CI PA L headed and executed by the main rescue coordina- O BJECTI V ES A RE BEI N G PU R- tion centre in Bodø, which quickly determined that SU ED BY STATO I L TH RO U GH I TS a fatal accident had occurred with no prospect of CO RPO RATE TH REE STEPS finding sur vivors. All efforts were successfully con- FO RW A RD TO A N EW M I LLEN N I U M PRO GRA M M E: centrated on finding the bodies of the deceased. Subsequently, ever y effort was made to identify the W e w i l l st r e n g t h e n o u r p o si t i o n cause of the crash. The make of helicopter con- a s N o r w a y ’s m o st i m p o r t a n t cerned was grounded until the technical inquir y co m p a n y f o r v a l u e cr e a t i o n . team had reported its findings. Statoil initiated an W e w ill ent er t he new extensive emergency response programme to look millennium as a leading after the bereaved, and emphasis will be given to i n t e r n a t i o n a l e n e r g y co m p a n y. following up these contacts. Helping to create a sense of security among personnel who depend on N o b o d y i n o u r i n d u st r y w i l l d o helicopter transport to and from their work on off- a bet t er job w it h healt h, t he e n v i r o n m e n t a n d sa f e t y. shore installations is another major task. Statoil celebrated its 25th anniversar y in 1997. W e w i l l b e t h e cu st o m e r ’s f i r st During this quarter-centur y, the group has built ch o i ce i n o u r m a i n m a r k e t s. itself up into the lead- Key f igures (NOK million) ing player in explo - O u r e m p l o y e e s w i l l e n h a n ce Income statement 1997 1996 1995 t h e i r e x p e r t i se a n d m a k e u s a n ration, production and Operat ing revenue 45 786 40 653 29 961 e v e n st r o n g e r g r o u p . gas transport off Operat ing cost s 22 997 16 410 12 139 Nor way. It currently Depreciat ion 7 362 7 389 5 520 operates nine produc- Operating profit 15 427 16 854 12 302 ing fields and is other- wise a licensee in most Balance sheet at 31 December of the fields in produc- Current asset s 10 155 6 049 4 507 EX PLO RA T I O N tion on the Nor wegian Fixed asset s 59 658 53 171 51 938 A N D PRO D U CT I O N continental shelf. Total assets 69 813 59 220 56 445 One of Statoil’s The exploration and production business segment objectives is to become the industr y’s best produc- embraces the following business areas: Exploration tion operator by 2000, and to maintain this status & Development Nor way, Oil Operations, Natural thereafter. Gas Production & Transport, Natural Gas Fields operated by the group yielded 472 mil- M arketing & Supply, International Exploration & lion barrels of oil and 28.5 billion cubic metres of Production, Natural Gas Business Development and gas. Statoil’s net daily share of production in 1997 Exploration & Production Technology. averaged 386 000 barrels of oil and 17 million cubic Net reser ves available to Statoil increased by metres of gas. Average daily output of entitlement 336 million barrels of oil equivalent in 1997. They oil declined by 53 000 barrels, to a great extent rose internationally by 401 million barrels of oil because swap agreements were concluded for inter- equivalent, while declining by 65 million on the ests in Nor wegian and British offshore fields dur- Nor wegian continental shelf. The international ing 1997. These transactions reduced production share of the group’s overall reser ves rose from and reser ves in the short term but extended the 800 eight to 16 per cent during the year. Statoil’s total group’s holdings in exploration acreage. 600 oil and gas reser ves increased by eight per cent. Operational regularity on Nor wegian oil and 400 gas fields was good in 1997. Capacity and flexibility 200 Operat ions off Norw ay in the production and transpor t systems confirm 0 During commissioning of the Norne production the reliability of Nor way’s offshore oil and gas 95 96 97 NET SHARE OF OIL AND ship, a helicopter crashed on its way to the field. All deliveries. GAS PRODUCTION OFF 12 people on board lost their lives. This serious Gullfaks produced 414 000 barrels per day in NORW AY 1 000 B.O.E/ DAY. accident underlines the risks associated with oil 1997. The main Gullfaks field had yielded 1.4 billion operations. A major emergency response operation barrels of oil at 31 December, which is 94 million STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 17

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    STATOIL’S OPERATIONS above the expected level of recovery when the field Operational regularity on Yme improved sub- came on stream in 1986. Production from satellite stantially during 1997, when the field achieved an fields in the Gullfaks area is due to start in autumn output of 35 000 barrels per day. Production was 1998. Statoil’s ambition is to double overall oil recov- nevertheless somewhat lower than expected, ery from the licence to about 2.8 billion barrels. mainly because of a labour dispute and technical Installations on Gullfaks are playing an increas- problems in the early par t of the year. Work to han- ingly important role as production hubs in the dle a rising water Tampen area of the Nor wegian North Sea. In addi- cut has been initi- tion to output from Tordis, the A platform began ated. Oil was receiving stabilised oil from Vigdis in Januar y 1997. proved in the This means that Gullfaks, Vigdis, Snorre and Beta West struc- Statfjord can be tied more closely together in an ture during the operational production collaboration. Improved reg- summer of 1997. ularity increases overall value creation from the This will increase area. recoverable Gullfaks A was prepared during 1997 to start reser ves in the accepting oil from Visund in the summer of 1998. An licence by almost increase in volumes received from Tordis in block 30 per cent. THE NORNE PRODUCTION SHIP. 34/ 7 is under consideration. An important event in Development 1997 was the allocation of gas in Gullfaks South to planning for the structure is under way, with a possi- sales contracts from 2000. As a result, Gullfaks C - ble start to production in late 1998. and later the A platform - will be converted for com- Norne began producing on 6 November as the bined oil and gas processing. Together with the use first field off Nor way to be developed with a produc- of the Statpipe system, this means Statoil will tion ship. This project was brought in at a cost of achieve very good utilisation of existing infrastruc- NOK 8.4 billion, well below the NOK 9.6 billion ture in the Tampen area. For Gullfaks, new assign- budgeted in the plan for development and opera- ments mean its producing life could extend beyond tion. Production has gone ver y well, and will reach the expiry of the licence in 2016. 220 000 barrels of oil per day during 1998. The crew Daily output from Statfjord came to 404 000 bar- of 35 required to operate the ship is small by com- rels in 1997. Since this field also processes oil from parison with conventional platforms. Statfjord North, Statfjord East and Snorre, overall Production from Norne had to be suspended daily production and processing from the three temporarily at the beginning of Febr uar y 1998 Statfjord platforms averaged 842 000 barrels during because existing oil spill clean-up equipment had an INSTALLING SUBSEA SOLUTIONS ON SATEL- the year. unsatisfactor y level of performance. Oil from Norne LITE FIELDS ALLOW S Drilling in early 1997 confirmed the presence of is highly viscous. Work is under way to find equip- SUBSTANTIAL VOLUM ES oil on the northern flank of Statfjord, and the part- ment which can work effectively, and the problem OF OIL TO BE RECOV- ners resolved in October to develop this area with should be solved quickly so that production can ERED VIA EXISTING PRO- subsea solutions. A project has been initiated with a resume. DUCTION PLATFORM S. view to starting production via Statfjord C in August Troll produced 14.3 billion cubic metres of gas 1999. in 1997. The treatment plant at Kollsnes has suf- Heidrun’s daily output rose from 210 000 bar- fered a number of technical teething problems, but rels of oil in 1996 to 233 000 barrels. Gas has been these are in the process of being overcome. They delivered without unscheduled interruptions to the had no effect on operational regularity, which was new methanol plant at Tjeldbergodden since pro- 99.7 per cent over the year. duction began in the summer of 1997. Work is In the Sleipner area, Statoil produces gas and under way to increase recoverable reser ves and to condensate from Sleipner East, Sleipner West and achieve a future development of Heidrun North. Gungne. Production was stable in 1997 with high Production from Veslefrikk has come of f operational regularity. The plant for separating car- plateau, and the field flowed less in 1997 than the bon dioxide from the Sleipner West gas has yet to year before. The level of activity for well operations reach sufficiently high availability. Separated car- is still high, and new prospects in the area are bon dioxide is injected into the Utsira formation. being explored. Serious incidents and near-misses in the STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 18

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    Sleipner area were reduced from 15 to one. The number of gas leaks was also cut. Oil deposits have been discovered in the Sleipner area. Opportunities for profitable produc- A major series of licence t ransact ions w as carried out by St at oil t hrough it s Rubicon project . The aim has been t o st rengt hen t he group’s posit ion in select ed core areas off Norw ay and int ernat ionally in order t o enhance value creat ion. Rubicon represent ed a cont ribut ion t o reaching t he long-t erm daily product ion t arget of tion are now being assessed. one million barrels of oil equivalent in 2005. Statoil’s net share of daily production from The most import ant object ives w ere: To increase equit y int erest s in order t o boost compet it iveness fields operated off Nor way by other companies Great er inf luence on t he development of an area came to 113 000 barrels. Oseberg accounted for 70 Inf luence over and ut ilisat ion of inf rast ruct ure per cent of this volume and Snorre for another 20 Resource underst anding per cent. The group participates in 19 partner-oper- Opt imisat ion of human resources. RU B I CO N ated licences, which embrace 30 fields in all. Since St at oil has received int erest s in every licence aw arded in all Norw egian off shore licen- an important part of the group’s value creation sing rounds w it h t he except ion of t he f irst , second and 15t h. A need t heref ore arose t o occurs in such licences, Statoil is concerned to con- opt imise t he group’s port f olio of licence holdings. Int erest s in 32 licences off Norw ay tribute its experience and technology to these par t- w ere proposed by St at oil t o 18 companies as candidat es f or sw apping. nerships. Good attention is paid in par tner-operated A t ot al of f ive sw ap agreement s w ere concluded. The t ransact ions w it h Elf , Hydro and licences to health, the environment and safety and Tot al relat ed only t o Norw egian licences, w hile t hose w it h BP and Chevron also included UK int erest s. The t ot al value of t he 24 licence holdings aff ect ed by t he t ransact ions is measures for cost-effective operation. put at NOK 5-6 billion. These sw aps involved a t ot al of 340 million barrels of oil and 36.5 Although production will eventually decline in billion cubic met es of gas. St at oil w it hdrew f rom 10 licences as a result of t he t ransact i- some of the partner-operated fields, the significance ons, but t he group w ill cont inue t o manage t he st at e’s direct f inancial int erest in t hese. of such licences to the group is set to increase Thanks t o t he Rubicon agreement s, St at oil’s t ot al calculat ed resource base rose by 12.5 because new developments will make up for the lost million barrels of oil equivalent . The oil component has declined slight ly, w hile t he in- crease f or gas is 20 billion cubic met res. W hile t he t ransact ions reduce daily product ion output. Oil production is expected to increase in by 20 000 barrels of oil equivalent , t his w ill be off set in value t erms t hrough t he acquisi- 1998 as Varg, Visund, Oseberg East, Tordis East t ion of licence int erest s w hich embrace discoveries w here t he aim is rapid development and Ekofisk II come on stream. and an early st art t o product ion. The Rubicon t ransact ions have had t he f ollow ing eff ect s: • acquisit ion of an operat orship and increased int erest s in t hree licences in t he Sleipner core area • consolidat ion as t he leading company in t he Tampen core area t hrough an increased int erest in t he Kvit ebjørn licence Fields on stream - some important interests • St at oil’s aim of having 30-40 per cent holdings in it s core areas has t hereby been NCS Int erest Operat or at t ained in t w o licences St at f jord 42.7% St at oil • a st ronger st rat egic posit ion in t he Horda/ M øre core area t hrough t he acquisit ion of one operat orship and increased int erest s St at f jord Nort h 20.0% St at oil • expanded holdings in select ed producing f ields - Alba and Jupit er - on t he UK cont i- St at f jord East 12.2% St at oil nent al shelf . Sleipner East 20.0% St at oil Sleipner West 17.1% St at oil Horda/Møre area Gullf aks 12.0% St at oil Oseberg 14.0% Hydro Snorre 10.0% Saga Tampen Wedge Yme 35.0% St at oil Veslef rikk 18.0% St at oil Heidrun 11.9% St at oil Troll Oil 11.9% Hydro Stavanger Troll Gas 11.9% St at oil Sleipner Alba Norne 15.0% St at oil Njord 20.0% Hydro Jupiter STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 19

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    M any years of w ork on an EU gas direct ive culminat ed w hen polit ical agreement on a draf t w as reached at t he energy minist ers’ meet ing in December 1997. Toget her w it h t he elect ricit y direct ive adopt ed in 1996, t hese rules w ill provide a f oundat ion f or f urt her development of t he EU’s int ernal energy market . The aim is reduced gas prices f or consumers. The direct ive requires member count ries t o open t heir gas market s t o great er compet it ion, w it h 20 per cent specif ied as t he minimum w hen t he rules come int o f orce - in pract ice by 2000 at t he earliest . This level must rise t o 28 per cent af t er f ive years and 33 per cent af t er a decade. Third-part y access t o t ransmission and dist ribut ion means t hat gas companies and large consumers w ill have t he right t o negot iat e agreement s f or using gas t ransport syst ems. Such access can be denied by t he t ransport syst em ow ners on t he grounds of inadequat e capacit y, supply com- mit ment s imposed by t he aut horit ies, or serious f inancial problems in f ulf illing exist ing gas purchase cont ract s. A nat ional body must be appoin- t ed t o deal w it h possible conf lict s over denial of access t o pipelines and t ransport t erms. Pipelines relat ed t o product ion and landing of gas are designat ed “upst ream net w orks” and have separat e rules on t hird-part y access. M ember count ries w ill f rame t heir ow n regulat ions f or t hese syst ems on t he basis of t he direct ive. The general principle is t hat t hird-part y access also applies t o upst ream net w orks, but member count ries can t ake specif ied considerat ions int o account w hen shaping t he rules. These include pro- blems posed by dif f erences in gas qualit y, t he need t o avoid dif f icult ies in current and f ut ure product ion, problems f or ow ners or operat ors, and t he applicat ion of nat ional licensing syst ems. Gas companies w hich are caused major f inancial problems by t he direct ive because of t heir long-t erm purchasing commit ment s can seek exemp- t ion f rom t he provisions on t hird-part y access. Such applicat ions w ill go t o a nat ional body, w it h possible exempt ions approved by t he European Commission. The crit eria t o be applied w hen considering an applicat ion are w idely draw n. Since t he direct ive is general in it s f orm, no clear conclusions can be draw n about t he w ay t he market w ill develop. Each count ry is f ree t o advance at a f ast er pace t han t hat dict at ed by t he direct ive. Subst ant ial variat ion is t heref ore likely t o appear bet w een gas market s in t he dif f erent member count ries over coming years. A process remains t o be complet ed bef ore t he direct ive is f inally adopt ed. The agreed t ext w ill be submit t ed t o t he European Parliament f or comment during t he f irst half of 1998, w it h t he f inal decision t o be t aken by t he Council of M inist ers. Once t his has occur red, t he direct ive is expect ed t o be ext ended t o t he European Economic Area - including Norw ay. The direct ive represent s a polit ical compromise, and t here is no reason t o expect major changes in t he market on a st rict int erpret at ion of it s provisions. But t he crucial issue is w het her implement at ion w ill be f ast er and more f ar-reaching t han t he direct ive requires. Init ially, t he w ay t he major gas companies adapt t o t he rules w ill be more import ant t han t he act ual t ext of t he direct ive. Toget her w it h general t rends in t he market , t he gas direct ive w ill encourage a gradual shif t t ow ards great er compet it ion bet w een players in t he gas market . St at oil is prepared f or such a development . G A S D I RECT I V E A D O PT ED 20

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    STATOIL’S OPERATIONS G a s m a r k e t a n d su p p l y lowing the adoption of the European Union’s gas Statoil’s gas exports from Nor wegian offshore directive, and the entr y of new suppliers, will fields in 1997 came to 6.3 billion cubic metres. In increase competition. This has prompted the forma- addition, the group was responsible for marketing tion of several strategic alliances which could be 15.2 billion cubic metres of gas on behalf of the significant for Nor wegian exports in future. state’s direct financial interest ( SDFI) . Overall, The decision was taken in June Statoil’s marketing responsibility embraced 21 bil- 1997 to build a separation plant at lion cubic metres as against 18 billion in 1996. Kårstø for ethane. This product will be Nor way’s total gas exports reached 42 billion cubic sold as feedstock to Noretyl in Bamble, metres, up from 37 billion the year before. Norsk Hydro’s ammonia plant at Rafnes Deliveries under the Troll gas sales agreements and Borealis in Stenungsund. The came to 14.5 billion cubic metres in 1997. investment is to be channelled through On behalf of the Gas Negotiating Committee a separate company, Etanor DA, owned ( GFU) , Statoil signed a contract in Januar y 1997 with at present by Statoil, Hydro, Shell, Italy’s Snam gas company covering annual deliveries M obil and Conoco. Ethane supplies of six billion cubic metres of gas over 25 years. come from the Troll group. A GAS SALES CONTRACT WAS SIGNED Deliveries begin in 1999. A contract was signed in Long-term contracts have been W ITH TRANSGAS IN 1997. FROM LEFT: BENGT April 1997 with state-owned Transgas in the Czech secured to supply a total of 75 billion LIE HANSEN, NORSK HYDRO, ANDERS UTNE, SAGA PETROLEUM , AND PETER M ELLBYE, Republic for annual deliveries of three billion cubic cubic metres of Nor wegian gas per STATOIL, W ITH M IROSLAV GREC FROM metres over 20 years. Starting in May 1997, these year. Plateau deliveries will be attained THE CZECH COM PANY. sales will reach plateau in 2003. The GFU is negotiat- around 2005. Part of this volume has ing with other customers in Denmark, Poland and yet to be allocated to a source of supply. In the sum- Hungary over Norwegian gas sales. mer of 1997, the M inistr y of Petroleum and Energy The long-running disagreement between the resolved to allocate volumes to the Gullfaks satel- Nor wegian and British authorities over a Frigg lites and Huldra, both operated by Statoil. The min- treaty was resolved in 1997. This lays the basis for istr y also decided that a deliver y solution for Norne expanding Nor wegian gas exports to the UK by and Heidrun gas would be provided within existing linking the existing Frigg trunkline to the rest of gas sales contracts. Nor way’s offshore gas supply system. The authori- The Netra gas pipeline system in Germany had ties in the two countries have agreed to draw up a its first full operating year. On the basis of its inter- frame agreement which will make it easier to est in this company, Statoil has earlier concluded a secure permission to lay new pipelines between long-term agreement with Germany’s VNG on trans- their sectors, or to tie together their respective off- porting Norwegian gas from Emden to Salzwedel. A 2000 shore infrastructures. contract has also been concluded with Transgas on 1500 European gas consumption rose by 11 per cent transporting gas over the same route. In this con- 1000 in 1996. This sharp increase reflected not only a cold nection, Statoil will expand its use of capacity in 500 winter but also a rise in the number of household Netra. The latter system is due to be extended to 0 customers and rapid expansion in gas sales for elec- Dornum north of Emden during 1998-99. 95 96 97 STATOIL’S OIL tricity generation. Overall consumption increased RESERVES OFF NORWAY from 397 billion cubic metres in 1995 to Ex p a n si o n i n N o r w e g i a n r e se r v e s IN M ILL BBL. 442 billion, including 366 billion in west- Fifteen new discoveries were made off Nor way in ern Europe and 76 billion in central 1997, five of them in licences operated by Statoil. Europe. Average growth in 1973-95 was A total of 575 million barrels of oil and 180 billion 400 3.8 per cent. Preliminary figures for 1997 cubic metres of gas were found on the Nor wegian 300 show a decline in gas consumption from continental shelf during the year. Statoil’s share of 200 the year before because of milder weather. these volumes is 66 million barrels and 11 billion 100 Gas accounted for 21 per cent of pri- cubic metres. 0 mary energy consumption in western New discoveries and upgrading of reser ves by 95 96 97 STATOIL’S GAS Europe during 1996. This proportion Statoil in 1997 were a little higher than its produc- RESERVES OFF NORWAY should reach 24 per cent in 2010, according tion for the year. The group’s overall reser ves nev- IN BN SM 3 . to the International Energy Agency ( IEA) . ertheless declined because it swapped licence inter- Liberalisation of the gas market fol- ests off Nor way for holdings in UK licences as par t STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 21

  • Page 24

    STATOIL’S OPERATIONS of a long-term plan to concentrate its ef forts in plant for ethane is planned at Kårstø. The plan for selected core areas. installation and operation originally put investment During the year, recoverable oil volumes in at NOK 2.6 billion. This has since been raised to fields operated by Statoil of f Nor way were NOK 8 billion, primarily as a result of expanding upgraded by 421 million barrels. Statfjord the development and making it more complex. In accounted for 189 million barrels of this total. addition, some cost elements were underestimated Statoil drilled and spudded 14 exploration and at the planning stage. appraisal wells as operator in 1997. Drilling was pur- Statoil is developing the Siri field in the Danish sued in all areas of the Nor wegian continental shelf North Sea, with oil scheduled to begin flowing in except the Barents Sea. The group secured a large November 1998. The group has opted for a develop- exploration area in the special Barents Sea licens- ment solution which means the period from licence ing round. award to production start is just over three years. Siri Expanding reser ves off Nor way through a com- is estimated to contain recoverable reserves of 50-60 mitment to new exploration areas and models is a million barrels, but Statoil aims to improve recovery Statoil goal. Great interest has focused on the deep- and expand the reserve base in the area. The group water blocks awarded in the Vøring area as part of has a 40 per cent interest in Siri, where development the 15th offshore licensing round. Statoil was given costs are put at roughly NOK 2.5 billion. the operatorship for the Vema Dome. The first well As planned, the Zeepipe IIB gas tr unkline there proved to be dr y. Exploration of the Vøring began operating on 1 October 1997. The project area by Statoil and other operators will continue. BP came in at a total cost of roughly NOK 3 billion, and Hydro have made interesting deepwater discov- which is 12 per cent lower than forecast in the plan eries on the Nyk Ridge and in the Ormen for installation and operation. Lange area respectively. The Europipe II trunkline will carry Åsgard gas from Kårstø to Dornum in Germany, and these deliv- D e v e l o p m e n t p r o j e ct s a n d eries are due to start on 1 October 2000. To increase b u si n e ss p r o g r e ss flexibility in Norway’s gas transport systems to conti- Statoil participates in a number of develop- nental Europe, however, plans call for the line to begin ment projects in Norway and internation- operating on 1 October 1999. Because of objections to ally, both as operator and as a licensee. the planned route, alternative solutions are being Åsgard in the Norwegian Sea ranks studied to meet the scheduled completion date. as the biggest development off Norway Statoil has submitted a plan for installation and today. This project is being pursued in operation of the Troll Oil Pipeline II. This facility two phases. Oil production from Åsgard A Transport systems was originally due to start in October THE KÅRSTØ COM PLEX IS 1998 but has now been rescheduled to the first quar- Syst ems in operat ion Int erest Operat or BEING EXPANDED TO ter of 1999. This postponement reflects the low level St at pipe 58.3% St at oil ACCEPT GAS FROM of completion on the production ship when it was Norsea Gas 50.0% Phillips ÅSGARD. delivered to Statoil from the yard in Japan. Gas is Norpipe Oil 20.0% Phillips due to start flowing from Åsgard B in October 2000. Zeepipe 15.0% St at oil In the 1995 plan for development and operation, Oseberg Transport 14.0% Hydro development costs for Åsgard were put at NOK 29.7 Ula Transport 100.0% St at oil billion in current money. This estimate has since Sleipner East condensat e 20.0% St at oil been raised to NOK 33.8 billion and will be further Frigg Transport 29.0% Tot al increased by the delays to the production ship. Frost pipe 20.0% Elf The development also embraces constr uction of Troll Oil Pipeline 11.9% St at oil a pipeline for transpor t of rich gas to Kårstø and the Europipe I 15.0% St at oil construction of receiving and fractionation facilities Halt enpipe 11.9% St at oil there. Fractionation and extraction plants will be built at Kårstø in connection with the Åsgard project, and com- Syst ems under const ruct ion pleted before gas deliveries from this NorFra 9.7% St at oil field begin. In addition, a fractionation Åsgard Transport 13.6% St at oil ÅSGARD A IS BEING READIED FOR OIL PRODUCTION. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 22

  • Page 25

    O verall procurement by St at oil in 1997 amount ed t o NOK 44.4 billion, an increase of 27 per cent f rom t he year bef ore. Sixt y-f ive per cent of t hese purchases w ere made in Norw ay, w hile 35 per cent of t he cont ract s w ere placed w it h f oreign companies. The Norw egian cont ent w as somew hat low er t han in 1996. This ref lect ed a high level of act ivit y f or pipelaying services, w hich are not available f rom domest ic suppliers, and f or rig chart ering in t he int ernat ional market . St at oil w as responsible in 1997 f or 75 000 diff erent purchases, individual orders and cont ract s as w ell as supplement ary and change orders on exist ing cont ract s. Including all t he small purcha- ses not normally included in t he st at ist ical mat erial, t he f igure comes close t o 100 000. Cont ract ors are responsible f or a subst ant ial proport ion of t he operat ions required f or value creat ion in St at oil. As a result , cont inuous improvement processes are pursued in t he procurement ent it ies t o ensure t hat t he group becomes an ever more compet it ive and eff ect ive operat or w it hout af f ect ing saf et y on land or of f shore. A grow ing num- ber of long-t erm f rame cont ract s are being aw arded. In many cases, St at oil person- nel w ork in int egrat ed t eams w it h cont ract or employees. The group ut ilises f orms of cooperat ion w hich st imulat e commit ment and part icipat ion by t he supplies indust ry at an early st age in t he procurement process. This allow s bot h cont ract ors and t he group t o cont ribut e t o f urt her improvement s in purchasing. Having t he necessary expert ise is essent ial f or reaching St at oil’s object ives on procurement and cooperat ion w it h suppliers. Once a P U R C H A SI N G supplier has been chosen, it s best expert ise - in combinat ion w it h St at oil’s ow n know -how - is crucial f or a good result . W O RT H A L M O ST Toget her w it h it s cont ract ors, t he group w ant s t o meet f ut ure challenges by developing new t echnology. In t hat N O K 4 5 BI LLI O N cont ext , St at oil seeks t o support t he development of innovat ive product s w hich can reduce it s cost s, enhance saf et y and improve environment al prot ec- t ion. At t he same t ime, such advances w ill provide new commercial opport unit ies f or t he supplies indust ry. TERRY GOSSE (LEFT) AND BRIAN FISHER ARE W ORKING AT KVÆRNER ROSENBERG’S STAVANGER YARD ON THE TOPSIDES FOR THE SIRI PLATFORM IN THE DANISH NORTH SEA. 23

  • Page 26

    STATOIL’S OPERATIONS will carry oil to M ongstad from the Troll C plat- Statoil’s reserves outside Norway expanded form, presently under construction. Its overall cost substantially during 1997, rising from eight to 16 per is put at roughly NOK 600 million. cent of the group’s reserves. International reserves The NorFra gas trunkline has been completed, now total 750 million barrels of oil equivalent. and will begin operation with its terminal at The group produced 34 000 barrels of oil equiv- Dunkerque on 1 October 1998. In addition, modifi- alent per day from fields outside Nor way in 1997, cations to Statpipe - the Ekofisk by-pass - and Ula mainly from Britain’s Alba, Jupiter, Dunlin and Transport will come on line when the Ekofisk II Gr yphon fields and from Bongkot off Thailand. development is completed in the summer of 1998. Statoil brought the Lufeng 22-1 field in the Construction of the new Ekofisk centre means that South China Sea into production on 27 December Tommeliten Gamma is set to cease production. 1997. The group is also operator for the Viking field The Veslefrikk licence submitted a bid in the in the US Gulf of M exico. autumn of 1997 to supply third-party services for Early production began from Azeri-Chirag off Huldra. Installations on Veslefrikk have been chosen Azerbaijan on 12 November. This field is operated as the processing solution for Huldra condensate in by AIOC, a consortium of international oil compa- the plan for development and operation of this field, nies and Azeri state oil company Socar. Statoil has which calls for production to start in 2000. an 8.56 per cent interest in the field. Oil from Azeri- Plans for installation and operation of gas trans- Chirag is piped through Russia to Novorossiysk on port systems from Norne and Heidrun via Åsgard the Black Sea. Work has begun on a western-route were submitted in the summer of 1997. Both lines pipeline through Georgia to the Black Sea por t of are due to start up in the autumn of 2000. Suspa. A decision should be taken in 1998 on a pos- THE NORFRA LANDFALL Statoil and Saga Petroleum have initiated a col- sible full development of the field, which would AT DUNKERQUE IN FRANCE. laboration on developing Kristin, Lavrans, T yrihans require the construction of additional transpor t North and South and Trestakk in the Halten Bank capacity. South area off mid-Nor way. Reser ves are put at The Aran acquisition two years ago has not roughly 200 billion cubic metres of gas and almost yielded the results expected. Production properties 630 million barrels of oil and condensate. in the Connemara field of f Ireland were not up to Naturkraft, owned by Statoil, Hydro and expectation. Work on a development of this discov- Statkraft, was awarded a licence in 1996 to build two er y has therefore been halted, with NOK 1.2 billion gas-fired power stations. This decision was in costs charged against income. appealed to the M inistr y of Petroleum and Energy, Statoil participates in two licences of f Angola. which decided to reject the appeal in June 1997. Two major oil discoveries - Girassol and Dalia - The Nor wegian Pollution Control Authority has have been made in the licence operated by Elf. given permission to make preparations for starting Girassol has been declared commercial, with pro- construction, but an emission permit has yet to be duction planned to star t in 2001. Exploration has issued. Before a final decision on a development is begun in the other licence, where Esso is operator. taken, its profitability must be clarified. Conditions In Kazakstan, the group participates in the set by the authorities will be cr ucial in this context. Offshore Kazakstan International Operating PRODUCTION SHIP Statoil has increased its shareholding in Company ( OKIOC) . This consor tium has signed an NAVION M UNIN ON THE Hafslund ASA to about 17 per cent of the voting agreement with the national authorities which gives LUFENG FIELD IN THE stock. This company generates hydroelectricity. In SOUTH CHINA SEA. Januar y 1997, Statoil acquired 14.5 per cent of the shares in Vattenfall Naturgas AB. The latter pur- chases gas for the Swedish market and owns and operates the Swedish gas pipeline network. U p st r e a m o p e r a t i o n s o u t si d e N o r w a y The goal for international upstream operations in Statoil is to contribute 300 000 barrels of oil equiva- lent per day by 2005 to meeting the group’s overall objective of a daily production of one million barrels of oil equivalent. BRINGING AZERI-CHIRAG ON STREAM IN THE CASPIAN. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 24

  • Page 27

    STATOIL’S OPERATIONS it the first right to choose 12 exploration blocks in the Caspian. Preparations for spudding the first of the selected wells are under way, with drilling scheduled to start in August-September 1998. Statoil Venezuela CA is involved in planning and developing heavy crude in the Orinoco Belt and upgrading this to light low-sulphur oil. The group 500 400 has a 15 per cent interest in Sincor, which will 300 decide on a possible development during 1998. 200 A 30 per cent interest is also held by Statoil in 100 the production sharing agreement for the LL-652 0 95 96 97 field in Lake M aracaibo, with Chevron as operator. INTERNATIONAL OIL RESERVES This field was awarded in 1997. It currently pro- IN M ILL BBL. duces 12 000 barrels per day, but plans call for this to be upgraded to 115 000 barrels per day. ST A T O I L U K Statoil has signalled that it wishes to divest its offshore interests in Thailand, which include gas 60 B ECO M ES A N production from the Bongkot field. 50 40 E N E R G Y C O M PA N Y Operations by Statoil on the UK continental 30 20 shelf expanded substantially during 1997. When T 10 he group now has an energy company in Brit ain w hich awards were made in Britain’s 17th offshore licens- 0 95 96 97 operat es along t he w hole value chain f rom oil and gas ing round during Februar y 1997, the group INTERNATIONAL product ion on t he UK cont inent al shelf t o deliveries t o GAS RESERVES end users. received five operatorships and interests in four IN BN SM 3 . St at oil UK moved in January 1997 t o new London premises - St at oil additional licences. House - cent rally locat ed in Low er Regent St reet . M ore t han 200 The Vietnamese authorities have approved the people current ly w ork f or t his subsidiary. development of the two gas fields discovered by From a modest daily out put of 2 000 barrels of oil equivalent , Statoil and BP in the Nam Con Son basin. Together most ly gas, in t he early 1990s, t he Brit ish company reached a pro- duct ion of 36 000 barrels of oil equivalent per day in 1997. The with partners, investment is due to be made in field expansion in product ion primarily ref lect s t he acquisit ion of Aran installations, a pipeline and receiving terminal, a in 1995 and sw ap deals concluded by t he Rubicon project in 1997. fertiliser plant and a power station. Out put is due t o increase f urt her w hen Schiehallion comes on Statoil was successful with 31 of its 41 bids for st ream in t he summer of 1998. Plat eau product ion f rom t his f ield acreage in the US Gulf of M exico, and secured the w ill be 200 000 barrels per day, w it h St at oil’s share amount ing t o 9 000 barrels. Locat ed w est of Shet land, Schiehallion is operat ed operatorship for five of these blocks. by BP and developed w it h a product ion ship. Experience from international operations so far Aw ards w ere made under Brit ain’s 17t h off shore licensing round in shows that attaining Statoil’s defined goals will be M arch 1997. St at oil did w ell, w it h f ive operat orships and int erest s demanding in the shor t term. The group places in a f urt her f our licences. Bef ore explorat ion begins in t his acre- great emphasis on analysing economic and political age, St at oil has reserves t ot alling 120 million barrels of oil equiva- lent on t he UK cont inent al shelf . risks, and is also ver y concerned to promote Toget her w it h M obil and Ent erprise Oil, it s part ners in t he At lant ic respect for human rights. M argin Group (AM G), St at oil UK w ill use t he same rig t o drill six w ells. A joint off ice t o operat e t his unit w as est ablished in Fields on stream - some important interests Aberdeen on 1 January 1998. The AM G collaborat ion reduces operat ing cost s f or t he part ners. An expansion of t his explorat ion Int ernat ional Int erest Operat or cooperat ion beyond t he six planned w ells w ill be considered on Luf eng, China 75.0% St at oil t he basis of experience gained. Bongkot , Thailand 10.0% Tot al In 1997, St at oil UK could look back on t he f irst f ull year of opera- t ion f or it s w holly-ow ned Alliance Gas Limit ed (AGL) subsidiary. Hyde, UK 45.0% BP This company expanded revenues subst ant ially, w it h sat isf act ory Dunlin, UK 14.4% Shell result s, af t er t he rest ruct uring in 1996. How ever, Brit ain’s liberali- Gryphon, UK 15.0% Kerr M cGee sed gas market is charact erised by st iff compet it ion and narrow Alba, UK 17.0% Chevron margins. AGL ranks t oday as one of t he biggest gas companies in t he UK, selling 1.3 billion cubic met res in t his market during 1997. Jupit er, UK 30.0% Conoco A quart er of t he volume represent ed St at oil’s ent it lement gas f rom Azeri-Chirag, Azerbaijan 8.6% AIOC Brit ish f ields. M ajor AGL cust omers include t he M arks & Spencer Viking, USA 50.0% St at oil ret ail chain and London Underground, w hich get t heir elect ricit y f rom pow er st at ions f uelled by gas purchased f rom AGL. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 25

  • Page 28

    STATOIL’S OPERATIONS petrol margins, a decline in sales volume for cer tain products, and restructuring and business develop- REFI N I N G A N D ment projects. M A RK ET I N G M easures have been implemented to trim just over NOK 400 million from annual costs in this The refining and marketing business segment business while downsizing its workforce by roughly embraces the Refining, M arketing and Oil T rading 350 employees. & Supply business areas as well as the Navion ship- To meet future competition, Statoil devoted ping company. substantial resources during 1997 to developing a new ser vice station concept. The first trial fore- O i l sa l e s courts are under construction in Sweden during the Statoil sold an average of 2.1 million bar rels of spring of 1998. crude oil per day during 1997, on a par with the The group initiated test marketing of electricity year before. These sales also embrace oil belonging to Nor wegian and Swedish households and indus- to the state’s direct financial interest ( SDFI) . tr y in 1997. Such sales will be integrated in Statoil’ s Crude oil trading operations are pursued by other energy marketing efforts, since the real con- Statoil from Stavanger, London, Connecticut and cern of customers is to secure lighting and heating Singapore. and not the particular energy carrier involved. THE M ONGSTAD North-western Europe was the most impor tant A number of pilot industrial customers are buy- REFINERY HAD ITS BEST outlet for the group’s crudes, but the north-eastern ing “usable energy” from Statoil, measured in kilo - YEAR IN 1997. USA and Canada absorb roughly a quarter of the watt-hours but supplied as either oil or electricity. volume marketed by Statoil. The choice of energy form is dictated by price and Fourteen crude oil cargoes were sold to the Asia- the customer’s production conditions. Pacific market in 1997, as against five the year before. In Sweden, Statoil has concluded a depot collab - Most of these consignments went to Taiwan. Statoil oration with Shell. M utual utilisation of each other’ s sold its first crude cargo to China during the year. depot networks allows both companies to improve The average per barrel price for Brent Blend in their efficiency and competitiveness. 1997 was NOK 135 ( USD 19.09) compared with The group sold its 50 ser vice stations in east- NOK 133 ( USD 20.67) the year before. Prices for ern Germany during 1997, but is continuing to this reference crude ranged from USD 24.95 to develop station networks in Poland and the Baltic USD 16.08 during 1997. states. At 31 December, Statoil had about 65 sta- OIL TRADING IN STATOIL. tions operational in Poland and roughly 60 more in Re t a i l i n g the Baltic states. The group ranks among the Competition is stiff in the Scandinavian retail mar- largest international players in both these markets. ket for oil products. A growing number of unstaf fed Conoco’s former ser vice stations in the outlets around Nor way are exerting heavy pressure Republic of Ireland were successfully integrated on petrol margins. M arket instability and jockeying into Statoil’s operations. This has yielded a substan- for position between the companies have prompted tial expansion in market share and earnings. The frequent and lengthy price wars. group currently occupies a leading position in the Profitability was weakened in 1997 by lower Irish market. Key f igures (NOK million) Re f i n i n g Income statement 1997 1996 1995 Statoil’s refining operations yielded their best-ever Operat ing revenue 97 449 89 037 72 127 results in 1997. Good market prices were achieved Operat ing cost s 94 261 85 605 70 091 during the year. M argins in the industr y showed a 2500 2000 Depreciat ion 1 887 1 764 1 634 particular improvement for upgraded refineries 1500 Operating profit 1 301 1 668 402 with little or no heavy oil production and good 1000 prices for special products such as propane and cal- 500 Balance sheet at 31 December cinated coke. 0 95 96 97 Current asset s 21 086 20 363 17 459 The refineries have defined ambitious improve- STATOIL’S OIL Fixed asset s 23 777 21 068 20 580 M ARKETING ment programmes with the focus on increased 1 000 B/ D. Total assets 44 863 41 431 38 039 value creation, reduced costs and profitable invest- STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 26

  • Page 29

    STATOIL’S OPERATIONS ment projects. These programmes have made big petrol quality which the EU is expected to intro- contributions to results for the year, not least duce. During the year, Kalundborg delivered petrol through ver y high plant availability and capacity with two per cent benzene to the Danish market utilisation, optimising the crude oil and condensate and with a one per cent content for Denmark’s 2.60 1997 mix, exploiting premiums in the market and cost emergency stocks. cuts. Statoil is participating in laying the Vestprosess 1.37 1995 Daily throughput during 1997 for the refineries pipeline to carry natural gas liquids and condensate GROSS REFINING at M ongstad in Nor way and Kalundborg in from Kollsnes and Sture to M ongstad. The group M ARGIN (FCC) USD/ BBL. Denmark amounted to 273 000 barrels. has also resolved to build an NGL plant at A new plant which came on line at the M ongstad and to modify the crude oil facilities at M ongstad refiner y in 1997 makes it possible to pro- this refiner y. Total investment for Statoil is put at duce petrol with a benzene content below one per roughly NOK 1.4 billion, and the installations will cent. This will be well within the specifications for be ready in autumn 1999. Once these projects have GEOLOGIST M ARSHA BOURQUE (CENTRE) AND PRESIDENT EGIL ENDRESEN (LEFT) AT STATOIL EXPLORATION IN THE USA SHOW THE GROUP’S EXPLORATION ACREAGE IN THE GULF OF M EXICO TO EXECUTIVE VICE PRESIDENT JOHAN NIC VOLD. ST R O N G E R T I N W O R L D ’ S L A R G E ST E N E R G Y M A R K E T he posit ion of St at oil in t he USA - t he w orld’s largest energy market - w as st rengt hened over t he past year. In 1997, t he group celebrat ed 10 years of operat ions at it s St at oil Nort h America Inc (SNA) subsidiary, w hich has primarily t raded crude oil and ref ined product s. Average daily sales by St at oil in t he USA during t he year came t o 409 000 barrels of crude oil and 24 000 barrels of product s. SNA serves t oday as t he parent company f or St at oil’s operat ions in t he USA. Sales of crude and product s are channelled t hrough St at oil M arket ing & Trading (US) Inc, gas is supplied by The East ern Group, w hile St at oil Explorat ion (US) Inc pursues explorat ion in t he Gulf of M exico. Through East ern, St at oil acquired Blazer Energy Corporat ion in 1997. This company w as involved in explorat ion, product ion, purchasing and market ing of oil and gas. The acquisit ion covered gas f ields and dist ribut ion net w orks in t he Appalachian area of t he nort h-east ern USA as w ell as int erest s in Gulf of M exico f ields. This purchase has made East ern t he biggest gas producer in t he Appalachian region, w hile Blazer’s int erest s in t he Gulf of M exico have been t ransf erred t o St at oil Explorat ion in Houst on. The acquisit ion increased t he group’s US oil and gas reserves f rom 35 million barrels of oil equivalent t o 125 million. Follow ing t he t ake- over, St at oil’s shareholding in East ern w as increased t o 99.8 per cent . This company is a t ot al supplier of energy, w it h a part icular involvement in pro- duct ion and dist ribut ion of gas and elect ricit y. During 1997, St at oil built up an explorat ion company in Houst on w it h some 50 employees w ho have broad experience f rom t he Gulf of M exico. St at oil Explorat ion (US) Inc current ly holds int erest s in 89 licences in t he Gulf of M exico. M ost of t his acre- age lies in very deep w at er. 27

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    STATOIL’S OPERATIONS been completed, M ongstad will be integrated even on schedule and to budget. A contract has also been more strongly into the group’s overall Nor wegian secured from Enterprise Oil for development, pro- oil operations. The new facilities will contribute to duction and offshore loading on Britain’s Pierce good synergies between the Kollsnes, Sture and field. This project will utilise the multipurpose shut- M ongstad installations. tle tanker Berge Hugin, owned 50-50 by Navion and An investment of NOK 135 million has been Bergesen d.y ASA. The Pierce contract is worth approved by Statoil for extending the cycle, upgrad- some NOK 2 billion for a minimum period of five ing and throughput in the cracker at M ongstad. years, with the field due to come on stream in the This work will be done during the regular mainte- third quarter of 1998. In addition, two multipurpose nance turnaround in April-M ay 1998. shuttle tankers under construction for Navion will Roughly NOK 250 million is to be invested at be outfitted for drilling by companies owned jointly Kalundborg in a plant for increased upgrading of with Smedvig ASA. One has been char tered to heavy oil. Due to come on line in early 1999, this Statoil for operations on the Åsgard field and other facility will improve the refiner y’s areas, while the second is due to drill for Shell in yield structure. the Gulf of M exico. Developing advanced technological solutions Navion through cooperation and alliances with selected Navion AS was established on engineering and manufacturing par tners is given 1 October 1997, with Statoil emphasis by Navion. It cooperates with such com- owning 80 per cent of the panies as Advanced Production and Loading ( APL) shares and the remaining 20 and Framo Engineering over the submerged turret per cent held by loading ( STL) and submerged turret production Rasmussengruppen AS. ( STP) systems, and with Advanced Production Operations embrace floating stor- Systems ( APS) on processing equipment for multi- age and production solutions purpose shuttle tankers. ( multipurpose shuttle tankers) , Offshore loading of crude oil into specially- shuttle tankers, conventional trans- equipped vessels is another core business for port of crude and refined oil, gas Navion. The company of fers flexible contracts of transport and maritime technol- affreightment in this sector as an alternative to time ogy. The company is a continuation charters. Positive progress has continued in this M ULTIPURPOSE SHUTTLE of the former Shipping & M aritime Technology market. The company has a substantial number of TANKER BERGE HUGIN business area in Statoil, supplemented by ships contracts of affreightment for both Nor wegian and W ILL PRODUCE BRITAIN’S transferred from the Rasmussen group. It also owns British fields - including Norne, which came on PIERCE FIELD. 50 per cent of the shares in Rasmussen M aritime stream in November 1997. Demand for of fshore Ser vices AS, which has management and site super- loading has expanded in line with rising production vision responsibility for all Navion newbuildings. At from the Nor wegian continental shelf. This 31 December, the company had 125 employees. prompted orders for four new shuttle tankers dur- Its fleet in ser vice at 31 December totalled 50 ing the year. 95 96 97 vessels, including two multipurpose shuttle tankers, Navion is also a substantial player in conven- 726 801 886 16 conventional shuttle tankers, three storage tional tanker transpor t, with an overall cargo capac - ships, 24 conventional tankers - 12 for cr ude oil and ity of roughly two million deadweight tonnes. The 12 for products - four gas carriers and a methanol market for conventional shipping and gas transpor t tanker. These vessels meet high technical and envi- has shown positive progress. Navion’s earnings NUM BER OF OIL CARGOES LOADED ronmental standards. In addition, eight ships on benefited from good market positions in relation to OFFSHORE. order are due to become operational by 1999. These rising freight rates. include two multipurpose shuttle tankers, five ordi- Important strategic challenges facing Navion 95 96 97 nar y shuttle tankers and a production ship hull. are to maintain and extend its position as the lead- 43 42 50 Navion offers complete production, loading and ing supplier of offshore loading ser vices in the transport solutions for fields of all sizes. Its Navion North Sea while simultaneously of fering complete M unin vessel began producing oil from the Statoil- ser vices internationally for field development, pro- operated Lufeng 22-1 field in the South China Sea duction and transpor t. SHIPS IN SERVICE. during December 1997. This project was completed STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 28

  • Page 31

    STATOIL’S OPERATIONS fixed costs at each production facility by 30 per PET RO CH EM I CA LS cent. The group has taken over as operator of the North Sea Petrochemicals propylene and polypropy- Statoil’s petrochemicals business segment lene plants in Belgium, which are owned with embraces the M ethanol business area and a 50 per Montell. With effect from 1 January 1997, Borealis cent holding in the Borealis petrochemicals group. became sole owner of the polypropylene plant. Several projects are being pursued in Asia. Bo r e a l i s Establishing production capacity in this region is Borealis was established in 1994 through a merger seen as an important factor for long- of petrochemical operations at Statoil and Neste, term success in the industr y because which own this group 50-50. W ith 5 000 employees of strong growth there in consumption and production facilities in eight countries, Borealis of petrochemical projects. Borealis and is one of the largest European petrochemical pro- Abu Dhabi’s state-owned oil company ducers. Its principal products are the plastic raw Adnoc have signed a letter of intent on materials polyethylene and polypropylene ( poly- collaborating over the construction of olefins) as well as the base petrochemicals ethylene one ethylene and two polyethylene and propylene ( olefins) . plants. A 40 per cent stake in the pro- Results achieved by Borealis in 1997 marked a duction company will be held by substantial improvement on the year before. This Borealis. The polyethylene plants will THE PETROCHEM ICAL performance reflects both firmer market conditions incorporate the Borstar technology developed by COM PLEX OPERATED BY for petrochemical products and the effects of inter- the group. Production is due to star t in 2001. In BOREALIS AT BAM BLE IN nal improvement processes. M argins in the indus- China, Borealis is working to establish joint ven- NORWAY. try rose during 1997 as a consequence of strong tures for polyethylene production. growth in demand for polyolefins and limited new With the improvement efforts launched by production capacity. This resulted in high capacity Borealis and its new projects in Asia, the group has utilisation. The petrochemicals market in early 1998 taken an important stride towards strengthening its is characterised by high margins. leading position in European markets and laid a European demand for polyolefins is expected to good foundation for establishing production and continue expanding, but less rapidly than over the marketing outside Europe. past 10-15 years. Growth in demand is expected to Borealis improved its health, environmental remain high in other regions, such as Asia, Latin and safety position in 1997, but fur ther improve- America and eastern Europe, where consumption of ments remain both necessar y and realistic. plastics remains ver y low. There is a danger that Hydrocarbon emissions were reduced from prices and margins will be reduced over the next 7 700 tonnes in 1996 to 7 140 tonnes, while sulphur few years through the construction of new capacity. dioxide and nitrogen oxide emissions remained Borealis achieved positive results from its virtually unchanged. improvement programmes in 1997. Throughout the Neste signed a letter of intent in September 1997 year, the group also maintained high and stable out- on the sale of its 50 per cent interest in Borealis to put at virtually all its plants. It intends to reduce the Austrian oil company OMV and the International Petroleum Investment Company ( IPIC) , Abu Dhabi’s Key f igures (NOK million) state-owned company for foreign investment. OMV Income statement 1997 1996 1995 and IPIC will each own 25 per cent of Borealis. At the Operat ing revenue 1 335 420 1 261 same time, Borealis signed a letter of intent on Operat ing cost s 860 203 155 acquiring OMV’s PCD polyolefin company. Final con- tracts on these transactions are due to be signed dur- Depreciat ion 79 4 0 ing the first half of 1998. Operating profit 396 213 1 106 Balance sheet at 31 December M ethanol Current asset s 302 5 125 The methanol project was completed in spring 1997 Fixed asset s 7 733 6 770 6 337 after three and a half years of construction work Total assets 8 035 6 775 6 462 with a lost-time injur y frequency of 2.3 per million STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 29

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    STATOIL’S OPERATIONS working hours. This is I n t e r e st - b e a r i n g d e b t ver y low compared with The group’s interest-bearing debt is largely denomi- other Nor wegian projects, nated in US dollars, either directly or through cur- both inside and outside rency swap agreements. This strategy has been Statoil. The methanol plant adopted because future cash flow from operations at Tjeldbergodden in mid- in USD is expected to be significantly higher than Nor way began operation interest charges and debt repayments. on 5 June, and quickly NOK 2.8 billion in currency loss has been reached full production. charged against income in 1997 because of the Its output has been suc - strengthening of the USD exchange rate against the cessfully introduced to the Nor wegian krone. M ost of this loss is unrealised, THE M ETHANOL PLANT AT north-west European market, and production for and will be more than offset by the increased sales TJELDBERGODDEN WAS the coming year is already sold. value of future production. OFFICIALLY OPENED IN Work at Tjeldbergodden is based on multi- The average interest rate on the group’s debt in JUNE 1997. skilled teams and a focus on the process. This 1997 was 5.4 per cent as against 6.2 per cent the organisational model ser ves as a pilot within Statoil year before. These loans have an average maturity for new and more effective modes of operation. of seven years and a shor t interest lock-in period. Eq u i t y ca p i t a l Statoil aims to have a book equity capital which O T H ER O PERA T I O N S amounts to at least 35 per cent of total capital. An equity ratio of this size is considered necessar y to Norferm, which is owned by Statoil and Nycomed, achieve satisfactor y financial flexibility and to has awarded a contract to APV Dair y for construc- exploit commercial opportunities in a business as tion of a bioprotein plant in association with the competitive and capital intensive as the petroleum methanol plant at Tjeldbergodden. W ith production industr y. At 31 December 1997, the equity ratio was due to begin in summer 1998, this facility will have 32.4 per cent. an annual capacity of 10 000 tonnes. Production of liquefied natural gas was initiated Re t u r n o n ca p i t a l in late 1997 at Tjeldbergodden by Tjeldbergodden While the group’s long-term objective is a return on Luftgassfabrikk. W ith an annual capacity of 10 000 capital employed of 12 per cent, the actual figure for tonnes per year, this liquefaction plant represents 1997 was 8.6 per cent. The principal reasons for the the first commercial production of LNG in Nor way. failure to reach the target include costs incurred in Statoil is marketing the product itself, with international upstream operations - with the Trondheim Energiverk as its biggest customer. The Connemara project off Ireland as the biggest item. latter uses LNG to replace heavy fuel oil in the city In addition, Statoil is pursuing a number of develop- of Trondheim’s district heating system. LNG repre- ment projects. These increase its capital employed, sents a contribution to developing cleaner energy. but will not generate revenue until later. Statoil is working on business developments at Tjeldbergodden which would make additional use Fu n d m a n a g e m e n t of capacity in Haltenpipe, available land and the Liquid assets held by the group and by Statoil’s pen- infrastructure. sion funds are largely placed in bonds and cer tifi- cates. A growing proportion of these funds are held in liquid shares. Historically, such assets have been placed in Nor wegian securities, but the foreign FI N A N CI A L CO N D I T I O N S share has been increasing in recent years in order A N D RI SK S to spread risk. At 31 December, overall placements outside Nor way accounted for roughly 26 per cent Key financial parameters for Statoil include return of the portfolio. on capital employed and the equity ratio. Capital The return on funds under management - includ- employed is defined as total capital less non inter- ing the pension funds, which are not consolidated in est-bearing debt. Statoil’s accounts - came to 14.4 per cent in 1997. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 30

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    STATOIL’S OPERATIONS Pr o p e r t y i n su r a n ce years. At today’s level of production, a 10 per cent Statoil Forsikring a.s provides the group with cover change in gas prices will af fect operating profit by for land-based and offshore installations under con- about NOK 500 million. struction and in operation at their estimated replace- ment cost. Policies also cover third-party and trans- Op er at i o n s port risks. Virtually all the insurance provided by Stable and secure operation of production installa- the company is restricted to Statoil-related risks. tions and high regularity in the pipeline systems are Statoil Forsikring retains about 42 per cent of the important both for revenue flow and for maintaining sum assured, which totals roughly NOK 69 billion, Statoil’s reputation among customers as a reliable for its own account. The balance is placed in the long-term supplier. Norwegian and international reinsurance market. Total equity and insurance provisions at 31 Re se r v e s December amounted to NOK 5.1 billion. Expanding reser ves through discoveries, acquisi- tions and improved recover y will be crucial for St a t o i l ’ s p e n si o n f u n d s future operations and cash flow. The Statoil pension funds are organised as indepen- THE EXCHANGE RATE OF dent trusts with the purpose of providing retire- Fo r e i g n e x c h a n g e THE US DOLLAR AGAINST THE NORW EGIAN KRONE ment and disability pensions for employees as well Statoil’s net cash flow is largely denominated in US IS IM PORTANT FOR as pensions for sur viving spouses and children. dollars. Viewed in isolation, a rise in the USD STATOIL’S EARNINGS. These funds have about 12 000 members in employ- exchange rate against the NOK will increase the ment and 1 000 pensioners, and manage funds value of the group’s future earnings. The bulk of totalling NOK 8.8 billion. The pension funds are not the group’s interest-bearing debt is denominated in consolidated in the Statoil accounts. USD. Although an increase in the USD/ NOK exchange rate would be favourable in the Va lu a t io n longer term, the immediate accounting ef fect The value of shareholder’s equity in Statoil at June of a rise of NOK 0.50 per USD is an unrealised 1997 was estimated by two financial institutions to currency loss of roughly NOK 1.4 billion. total NOK 110-120 billion. An important consideration in these valuations Pe t r o c h e m i c a l s is the assumptions made about future cash flows. A change in polyolefin margins of DEM 100 per M any factors could influence these flows, of which tonne would affect Statoil’s net profit by roughly the most important are: NOK 300 million. O i l p r o d u ct i o n Co v a r i a n c e s Statoil’s equity value is largely dependent on the Analyses confirm that there are different covari- production of entitlement oil. This depends in tur n ances between market risks for Statoil’s principal 7.32 on reser voir properties, knowledge of these, and products. As a result, the group’s overall risk is sub- 1997 6.92 1993 expertise which permits a high recover y factor. A stantially lower than the sum of risks for the indi- five per cent change in the production of entitle- vidual products. ment oil will affect operating profit by about NOK 1 USD/ NOK billion. Ta x EXCHANGE RATE. Historically, Statoil’s cash flows have largely been O i l p r i ce s created through production and transpor t of petro- At an output of entitlement oil corresponding to the leum from the Nor wegian continental shelf. Risks 1997 level, a USD 1.00 change in the price of a bar- associated with this business have been greatly rel of oil will affect operating profit by roughly NOK moderated by a marginal tax rate of 78 per cent. 1.2 billion. The expansion in the group’s international upstream operations means that substantial expen- Ga s ditures are incurred in countries where the group is Statoil’s supplies of entitlement gas increased sig- not yet in a tax position. Losses in these countries nificantly when Troll Gas began producing in 1996, can only be deducted from taxable income in and are likely to continue expanding in coming Nor way to a limited extent. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 31

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    STATOIL’S OPERATIONS exploration and production segment on reporting H EA LT H , T H E EN V I RO N M EN T incidents with a high loss potential - both actual accidents and near-misses. This reporting is used in A N D SA FET Y part to calculate a total risk index. The latter improved considerably during 1997, and the same Statoil will be in the forefront for health, the envi- positive trend was seen in the number of gas leaks. ronment and safety, and its aim is that nobody in Ver y ambitious targets have been set for HES the industr y will do a better job with HES by 2000. work in Statoil. By 2000, no other company in the The group’s most important challenges in this area industr y will be better in this area. The “zero mind- are: set” represents an important tool in this connection. • embedding the goal of zero injuries and Its principal elements are that injuries and damage polluting emissions to the environment and material assets can be • climate change avoided and that all employees must think preven- • emission standards and green taxes tion and improvement in ever y context. 5.6 • requirements on product quality and liability 1993 e goal is z Th er • exploiting the commercial opportunities for Th e e n v i ro n m e n t o value creation offered by a conscious The climate conference at Kyoto in Japan approved 3.8 1997 commitment to HES. a protocol on reducing greenhouse gas emissions The chief executive’s HES prize was awarded to which will have an impact on Statoil’s operations. A THE LOST-TIM E INJURY the road tanker drivers at the Statoil Centre in broad commitment will be made to following up the FREQUENCY PER M ILLION W ORKING Fredericia, Denmark, who have not had a lost-time intentions of this agreement. Statoil is suppor ting HOURS. injur y for 30 years. research and development which can contribute fac - tual knowledge on the scientific, economic and Sa f e t y social significance of climate challenges. Statoil par- It is deeply regrettable that a total of 14 people lost ticipates in the World Bank’s work on establishing a their lives in connection with Statoil’s operations in climate-related global investment fund. 1997. The helicopter crash near Norne caused 12 An internal goal of reducing carbon dioxide fatalities, while one person drowned on the emissions by 30 per cent over a decade has been set Connemara field off Ireland and another died after a by Statoil. Covering its own plants, this target is pipe-handling accident at Bredero in Farsund. measured against the level emissions would have The level of safety, measured by the lost-time reached in this period if no action were taken. An injury frequency, has been improving for a number extensive technology programme has been initiated of years. In 1996, lost-time injuries for Statoil employ- at an overall cost of NOK 600 million, of which ees and contractor personnel had a frequency of 3.4 Statoil will pay NOK 300 million. Successful imple- per million working hours. This figure rose to 3.8 in mentation of this project will reduce the group’s own 1997, a negative trend which the organisation has emissions by about two million tonnes per year. taken seriously and intends to reverse. Through the development and application of However, other measurements of safety show technology and new solutions, the group is working positive results. Great emphasis is placed in the to reduce discharges to the sea and emissions to the air. Emissions per unit produced have been reduced through such measures as more low nitro- gen-oxide burners, cessation of permanent flaring on further installations and injection of produced water and drill cuttings. New technology for inject- ing drill cuttings has been applied for the first time on mobile rigs via a seabed system. Recommendations from Nor way’s M iljøsok pro- gramme are being followed up in an internal improvement programme, with corporate goals for all types of emission to air and water. ERIK CHRISTENSEN IS ONE OF THE ROAD TANKER DRIVERS AT THE Several motor fuels and lubricating oils based STATOIL CENTRE IN FREDERICIA, W HICH W ON THE CHIEF EXECU- on biological raw materials are now being marketed. TIVE’S HEALTH, ENVIRONM ENTAL AND SAFETY PRIZE FOR 1997. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 32

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    STATOIL’S OPERATIONS Work on problems posed by hydrate ( ice-like RESEA RCH plugs) in pipelines has yielded improved methods for removing these obstructions. The hydrate team A N D D EV ELO PM EN T won an internal research prize this year for its expertise and research in this area. Research and development in Statoil is intended to Improvements have been made to a computer help meet the group’s technological challenges tool for simulating multiphase flow. A commerciali- in exploration, development and produc- sation agreement with Scandpower makes this tion with solutions which fulfil its Nor wegian company responsible for mar- requirements for profitability, safety keting and administering the programme. and environmental protection. M any Flexible risers for use on Åsgard good R&D results were achieved dur- were tested and qualified at the Statoil ing the year, putting Statoil up among research centre. the leaders in impor tant sectors of the With its partners, Statoil has devel- petroleum industr y. oped a plant which makes it possible to STATOIL RESEARCH PRIZE Statoil’s research centre in Trondheim recover volatile organic compounds ( VOCs) 1997 has 340 employees. R&D are pursued in close coop- from crude oil cargoes on shuttle tankers rather Prof essor Olav Eldholm at t he geological inst it ut e of eration with universities, other research institutions than releasing them to the air. Converting VOCs to t he Universit y of Oslo w as and the supplies industr y, both in Nor way and ship’s bunkers turns an environmental problem into t he w inner of St at oil’s rese- internationally. Forty per cent of the NOK 600 mil- a valuable resource. arch prize f or 1997. lion committed in 1997 was for work done by exter- Statoil concluded a cooperation agreement with Present ed f or t he sevent h nal partners. The group participates in several EU South Africa’s Sasol on developing solutions for of f- t ime, t his NOK 150 000 aw ard goes t o Norw egian research programmes, and carries out technology shore conversion of gas to synthetic cr ude ( syn- researchers pursuing t opics assignments for licences in which Statoil is operator crude) and sulphur-free motor fuels. This technol- of signif icance f or t he grou- or partner. Through its collaboration with the ogy will help to ensure that gas is not lost, but p’s operat ions. Prof Nor wegian Academy of Sciences, Statoil suppor ts brought to market as syncrude together with nat- Eldholm w as honoured f or basic Nor wegian research in areas of significance ural crude. his w ork on t he f ormat ion and development of t he for the national petroleum industr y. A technological alliance has been formed by out er part of t he Four-dimensional seismic sur veying has been Statoil with Germany’s Linde AG on liquefied nat- Norw egian cont inent al adopted to monitor carbon dioxide injected into the ural gas ( LNG) . This par tnership submitted a pro- shelf , know n as t he cont i- Utsira formation in the Sleipner area. posal in 1997 to the licensees of the Snøhvit field. nent al margin. St art ing A computer tool has been developed for deter- The alliance’s study for a gas liquefaction plant of f f rom t he f ormat ion of t he Nort h At lant ic, he has ana- mining reser voir properties from data on pore sys- Hammerfest shows that investment costs and devel- lysed geological develop- tems in the formation sands and knowledge of the opment time could be reduced by 30 per cent. ment s and t he st ruct ure of physical laws governing liquid and gas flows. This Several patented solutions have been developed by t he Eart h’s crust associat ed tool will be used by geologists and reser voir engi- the alliance. w it h t hese areas. This w ork neers in Statoil to enhance reser voir understanding The Visok - enterprise description of the is highly relevant t o t he geological underst anding and to help improve recover y from such fields as Nor wegian continental shelf - programme has been of new explorat ion areas in Statfjord and Gullfaks. established as a key tool at Statoil for improving deep w at er. Another tool developed by Statoil can predict work processes in the exploration and development whether or not a well will produce sand. phases. Information technology combined with Combined injection of water and gas could sig - existing technical solutions and infrastr ucture have nificantly improve oil recover y. Research has clari- been adopted to make data available in line with fied the most important factors which must be operational requirements. The Visok team has taken into account if the gains of fered by this pro- developed computer solutions which provide access duction process are to be achieved. to licence and resource data for the Nor wegian con- Statoil’s five-year commitment to multiphase tinental shelf through interactive map solutions. In flow technology ended in 1997. Research and tech- addition come distributed computer solutions for nological development have yielded good results as planning, managing and following up exploration well as opportunities for cost-effective development and development operations. of small satellite fields and landing of natural gas liquids. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 33

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  • Page 37

    INCOM E STATEM ENT - STATOIL GROUP NORWEGIAN ACCOUNTING STANDARDS NOK M ILLION INTERNATIONAL ACCOUNTING STANDARDS 1995 1996 1997 1997 1996 1995 Sales and ot her operat ing revenue 101 080 124 017 142 097 Operat ing revenue 142 046 124 017 101 080 (15 705) (17 451) (18 125) Sales t ax, excise dut ies (18 125) (17 451) (15 705) Share of net prof it in 1 149 422 813 associat ed companies (12) 805 415 1 142 86 524 106 988 124 785 Net operat ing revenue (2, 3) 124 726 106 981 86 517 Operat ing cost s 45 013 54 883 67 206 Cost of goods sold (3) 67 206 54 883 45 013 19 420 23 100 28 492 Operat ing and administ rat ion cost s (4) 28 492 23 100 19 420 1 297 1 644 3 473 Explorat ion cost s (6) 2 285 1 277 1 020 6 902 8 828 9 175 Depreciat ion (7) 9 701 9 487 7 474 72 632 88 455 108 346 Tot al operat ing cost s 107 684 88 747 72 927 13 892 18 533 16 439 Operat ing prof it 17 042 18 234 13 590 (812) (674) (3 033) Financial it ems (8, 9) (3 053) (310) 1 099 13 080 17 859 13 406 Prof it bef ore t axat ion (19) 13 989 17 924 14 689 8 474 12 752 9 630 Taxat ion (10) 9 644 12 627 9 414 10 16 34 M inorit y shareholders' int erest 34 16 10 4 596 5 091 3 742 Net prof it 4 311 5 281 5 265 STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 35

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    BALANCE SHEET - STATOIL GROUP NORWEGIAN ACCOUNTING STANDARDS NOK M ILLION INTERNATIONAL ACCOUNTING STANDARDS 1995 1996 1997 1997 1996 1995 ASSETS Current asset s Liquid asset s (11) 1 037 4 595 1 404 Bank deposit s 1 404 4 595 1 037 5 116 5 754 5 076 Ot her liquid asset s 5 537 6 055 5 261 Short -t erm receivables (11) 16 328 18 007 19 879 Account s receivable 19 879 18 007 16 328 2 705 1 865 2 149 Ot her receivables 2 149 1 868 2 705 St ocks (11) 802 1 628 1 118 Raw mat erials 1 118 1 628 802 1 718 2 573 2 852 Finished product s 2 852 2 573 1 718 27 706 34 422 32 478 Tot al current asset s 32 939 34 726 27 851 Fixed asset s Shares and long-t erm invest ment s 4 519 4 619 5 393 Associat ed companies (12) 5 440 4 673 4 581 1 085 1 771 1 900 Shares in ot her companies (12) 1 900 1 771 1 085 4 086 3 762 3 924 Invest ment s (5) 3 924 3 762 4 086 68 189 69 691 77 843 Propert y, plant and equipment (2, 6, 7) 86 394 77 448 75 663 77 879 79 843 89 060 Tot al f ixed asset s 97 658 87 654 85 415 105 585 114 265 121 538 Tot al asset s 130 597 122 380 113 266 STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 36

  • Page 39

    BALANCE SHEET - STATOIL GROUP NORWEGIAN ACCOUNTING STANDARDS NOK M ILLION INTERNATIONAL ACCOUNTING STANDARDS 1995 1996 1997 1997 1996 1995 LIABILITIES AND EQUITY Current liabilit ies 2 117 4 329 1 910 Int erest -bearing debt (13) 1 910 4 329 2 117 12 499 12 702 14 269 Account s payable 14 269 12 702 12 499 3 842 7 578 3 321 Taxes payable (10) 3 321 7 578 3 842 1 851 1 600 2 941 Dividend payable 2 941 1 600 1 851 8 805 8 294 9 951 Ot her current liabilit ies (13) 9 951 8 286 8 805 29 114 34 503 32 392 Tot al current liabilit ies 32 392 34 495 29 114 Long-t erm liabilit ies 22 126 20 473 27 881 Loans (14) 27 612 19 554 20 834 5 126 6 121 6 605 Ot her long-t erm liabilit ies (15) 6 605 6 121 5 126 17 992 18 792 18 128 Def erred t axat ion (10) 23 962 24 925 24 256 45 244 45 386 52 614 Tot al long-t erm liabilit ies 58 179 50 600 50 216 104 143 1 548 M inorit y shareholders' int erest 1 548 143 104 Shareholder's equit y (16, 19) 4 940 4 940 4 940 Share capit al 4 940 4 940 4 940 26 183 29 293 30 044 Ret ained earnings 33 538 32 202 28 892 31 123 34 233 34 984 Tot al shareholder's equit y 38 478 37 142 33 832 Tot al liabilit ies and 105 585 114 265 121 538 shareholder's equit y 130 597 122 380 113 266 Guarant ees and secured liabilit ies (17) Ot her liabilit ies and commit ment s (18) St avanger, 18 February 1998 Kjell O Kran Yngve Hågensen M aurit z Sahlin Ellen M o Helge M idt t un Åse Simonsen Bjørn E Egeland Iver Pehrson Gunn Wærst ed Tormod Hermansen Harald Norvik President and chairman of t he execut ive board STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 37

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    CASH FLOW STATEM ENT - STATOIL GROUP NORWEGIAN ACCOUNTING STANDARDS NOK M ILLION INTERNATIONAL ACCOUNTING STANDARDS 1995 1996 1997 1997 1996 1995 Cash f low f rom/(t o) operat ions 81 743 105 510 121 547 Cash receipt s f rom operat ions 121 547 105 510 81 743 (60 605) (78 015) (98 437) Disbursement s t o operat ions (96 988) (77 541) (60 328) (696) (692) (1 764) Net f inancial it ems (1 284) (109) 230 Net bef ore-t ax cash f low 20 442 26 803 21 346 f rom operat ions 23 275 27 860 21 645 (8 711) (8 222) (12 619) Taxes paid (12 619) (8 222) (8 711) 11 731 18 581 8 727 Net cash f low f rom operat ions 10 656 19 638 12 934 Cash f low f rom/(t o) invest ing act ivit ies (16 247) (11 776) (21 064) Acquisit ion of f ixed asset s (22 993) (12 833) (17 450) 512 923 3 326 Sale/divest ment of f ixed asset s 3 326 923 512 (15 735) (10 853) (17 738) Net cash f low t o invest ing act ivit ies (19 667) (11 910) (16 938) Cash f low f rom/(t o) f inancing act ivit ies (2 119) (635) 680 Change in ot her liquid asset s 680 (635) (2 119) 1 995 (225) 220 Change in short -t erm debt 220 (225) 1 995 5 385 5 315 8 762 New long-t erm debt 8 762 5 315 5 385 (1 282) (6 774) (2 242) Reduct ion in long-t erm debt (2 242) (6 774) (1 282) (1 615) (1 851) (1 600) Dividend paid (1 600) (1 851) (1 615) Net cash f low f rom/(t o) 2 364 (4 170) 5 820 f inancing act ivit ies 5 820 (4 170) 2 364 (1 640) 3 558 (3 191) Net changes in bank deposit s (3 191) 3 558 (1 640) 2 677 1 037 4 595 Bank deposit s at 1 January 4 595 1 037 2 677 1 037 4 595 1 404 Bank deposit s at 31 December 1 404 4 595 1 037 STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 38

  • Page 41

    NOTES ON GROUP ACCOUNTS 1. Accounting policies Other liquid assets The group account s have been prepared in accor- Ot her liquid asset s are assessed at market value dance w it h bot h t he Int ernat ional Account ing and include monet ary inst rument s mat uring St andards (IAS), issued by t he Int ernat ional bet w een t hree and t w elve mont hs f rom t he dat e Account ing St andards Commit t ee, and t he of purchase, plus list ed securit ies. Norw egian generally accept ed account ing princi- ples (NGAAP) ref erred t o as Norw egian Stocks Account ing St andards. They include t he account s St ocks are valued at t he low er of acquisit ion cost of t he parent company, Den norske st at s oljesel- as def ined by t he f irst -in-f irst -out principle and skap a.s, and it s subsidiaries as described in not e ant icipat ed net sales price. Hedged st ocks are 10 t o t he parent company's account s. valued at t he low er of acquisit ion cost and Signif icant dif f erences bet w een t he NGAAP hedged price. and IAS account s are explained in a separat e sec- The acquisit ion cost of goods produced by t he t ion below . group consist s of direct mat erials, direct w ages and allocat ed indirect product ion cost s. For pur- Group consolidation chased goods, cost price and t ransport cost s are • Subsidiaries are def ined as companies in w hich included. St at oil, direct ly or indirect ly, has a majorit y vot - ing int erest . Shares in a subsidiary are eliminat - Gas sw apping ed in t he group account s against it s asset s and Gas sw apping/loan agreement s are account ed liabilit ies. The dif f erence bet w een t he market f or in accordance w it h t he sales met hod, w hereby value of a subsidiary’s asset s and liabilit ies at t he borrow er records t he sale as income on deliv- t he t ime of acquisit ion and t heir book value is ery t o t he cust omer. A corresponding provision is assigned t o t he respect ive balance sheet it ems. made f or t he ant icipat ed f ut ure cost of produc- Any excess value assigned t o propert y, plant t ion and possible t ransport of t he gas t o be rede- and equipment is depreciat ed accordingly. livered. When lending gas, t he low er of t he pro- Ot her excess value, adjust ed f or any minorit y duct ion cost and t he present value of est imat ed int erest s, is classif ied as goodw ill (past equit y f ut ure sales price is included in current asset s. met hod). • Associat ed companies are def ined as companies Over/ under-lifting of petroleum over w hich t he group has a signif icant inf lu- When t he volume of pet roleum lif t ed f rom a f ield ence and w here t he ow nership posit ion is of a dif f ers f rom t he part icipat ing equit y int erest , t he last ing and st rat egic nat ure. The group’s int er- product ion cost is adjust ed f or t he over/under-lif t . est in such companies’ annual result s, as adjust - ed f or depreciat ion of any dif f erence bet w een Property, plant and equipment t he purchase price of t he shares and t he int er- Such asset s are valued at acquisit ion cost less est in booked equit y capit al is recorded as oper- accumulat ed depreciat ion. Any upgrading cost s at ing revenue in t he group income st at ement w hich signif icant ly increase t he capacit y or lif e of in accordance w it h t he equit y met hod . t he asset are capit alised. • St at oil’s int erest s in oil and gas licences as w ell • Oil and gas explorat ion expendit ures as ot her joint ly-cont rolled operat ions are Drilling of explorat ory w ells in w hich hydrocar- included in t he respect ive income st at ement bons have been f ound, as w ell as acquisit ions and balance sheet it ems (st raight line met hod). of explorat ion right s, are capit alised. If , on f ur- • Int er-group t ransact ions and balances are elimi- t her evaluat ion, t he reserves are not considered nat ed. commercial, such previously capit alised explo- rat ion expendit ures are charged against Foreign currency translation income. On consolidat ion, t he income st at ement s of f or- • Leasing eign subsidiaries are t ranslat ed at average rat es M ajor lease agreement s w hich are de f act o of exchange f or t he year, w hile asset s and liabili- f inance leases are capit alised and depreciat ed t ies are t ranslat ed at closing rat es of exchange. over t he t erm of t he lease. The inst alment ele- Currency t ranslat ion dif f erences are post ed ment of t he lease obligat ion is show n as a long- direct ly against shareholder's equit y. t erm loan in t he balance sheet , and t he leased equipment as a f ixed asset . Bank deposits • Int erest Bank deposit s include cash in hand, t ime deposit s Int erest on cash f low s relat ed t o major develop- and ot her liquid asset s mat uring less t han t hree ment project s is capit alised unt il t he asset is mont hs f rom t he dat e of purchase. ready f or use. Capit alised int erest is included as STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 39

  • Page 42

    NOTES ON GROUP ACCOUNTS part of t he cost price and depreciat ed along St at oil buys all oil received by t he st at e as roy- w it h t he capit al asset concerned. alt y in kind f rom f ields on t he Norw egian cont i- • Depreciat ion nent al shelf . St at oil includes t he cost s of purchase Depreciat ion of product ion inst allat ions and and proceeds f rom t he sale of t his royalt y oil in it s f ield-dedicat ed t ransport syst ems f or oil and operat ing cost s and operat ing revenue respec- gas is calculat ed using t he unit of product ion t ively. met hod based on est imat ed proved reserves expect ed t o be recovered during t he licence Research and development period. Ordinary depreciat ion of t ransport sys- Cost s of research and development are charged t ems used by several f ields and of ot her asset s against income as incurred. is calculat ed on t he basis of t heir economic lif e expect ancy, using t he st raight -line met hod. Pensions • Sit e removal cost s Pension right s earned by group employees are Annual provisions are made f or f ut ure sit e mainly secured t hrough pension schemes in insur- abandonment and removal cost s based on t he ance companies or t he group's ow n pension current price level and an ant icipat ed removal f unds. concept , using t he unit of product ion met hod Annual cost s and t he liabilit y incurred are cal- • M aint enance culat ed on t he basis of a st raight -line earning of Ordinary maint enance and repairs are charged pension right s. The liabilit y is compared w it h t he against income w hen perf ormed. Provisions market value of t he pension f unds. Changes in are made f or cost s relat ed t o periodic maint e- t he pension obligat ion due t o alt ered economic nance programmes. and act uarial assumpt ions are allocat ed over t he average remaining pension-earning period. Goodw ill Goodw ill is capit alised and depreciat ed over it s Transactions in foreign currencies economic lif e expect ancy, up t o a maximum of 20 It ems in f oreign currency are t ranslat ed t o NOK as years, using t he st raight -line met hod. f ollow s: • Income, expenses and f ixed asset s are recorded Royalty at a mont hly rat e of exchange set f or account - The product ion volume paid by St at oil as royalt y ing purposes. in kind f or it s part icipat ion in t he various produc- • Liabilit ies and current asset s are t ranslat ed at t ion licences is booked at market price and show n closing-dat e rat es of exchange. as operat ing income and cost s respect ively in t he income st at ement . Financial instruments The f ollow ing account ing policies are applied f or Trading t he principal f inancial inst rument s: Trading of crude oil and product s is included in • Currency sw ap agreement s operat ing revenue and operat ing cost s to the For long-t erm debt exchanged f rom t he origi- extent that such transact ions involve physical deliv- nal f oreign currency t o anot her (open) currency eries. The net proceeds of transact ions not involv- at an agreed rat e of exchange, t he open cur- ing physical deliveries (paper market ) are included rency posit ion is applied w hen t ranslat ing t he in the operat ing prof it /loss. Unrealised gains and debt t o NOK. losses on forward sales of crude oil and product s • Forw ard currency cont ract s are recorded as income/expenses as incurred. Unrealised gains or losses on hedging cont ract s are of f set against losses or gains on t he it ems Transactions w ith ow ner hedged. The int erest element is allocat ed over As manager of t he st at e's direct f inancial int erest t he cont ract period. Unrealised gains or losses in t he pet roleum indust ry, St at oil market s and on unhedged t rading cont ract s are recorded in sells t he st at e's share of product ion of f shore t he income st at ement as incurred. Norw ay. • Int erest sw ap agreement s The value of st at e equit y crude bought by The net ef f ect of income and cost s relat ed t o St at oil f or f ut ure sale t o ext ernal cust omers or f or int erest sw ap agreement s is allocat ed over t he ref ining is included in group operat ing revenue cont ract period. and operat ing cost s respect ively. The t it le t o such oil w hen direct ly sold f rom a f ield t o an ext ernal Taxation cust omer is not t ransf erred t o St at oil. The net The t ax expense in t he income st at ement repre- result of t his t rading business is included in oper- sent s t he t ot al amount of payable and def erred at ing prof it . t axes relat ed t o t he current year's prof it , as w ell STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 40

  • Page 43

    NOTES ON GROUP ACCOUNTS as changes in def erred t axat ion due t o amended Int erest t ax rat es. The def erred t axat ion liabilit y compris- Int erest is charged against income as incurred. es bot h f ut ure t axes payable on reversal of t em- porary dif f erences, and def erred t ax calculat ed List ed securit ies classif ied as current asset s on assignable value added or reduced on consoli- Unrealised gains are not recognised as income. dat ion of subsidiaries in accordance w it h t he past equit y met hod. Unrealised f oreign exchange gains Full provision is made using closing-dat e t ax Unrealised f oreign exchange gains relat ed t o rat es and undiscount ed amount s. Tax relat ed t o long-t erm monet ary it ems are not recognised as f ut ure dividends f rom operat ions t axable as ship- income. ping act ivit ies is included in t he provision at it s est imat ed present value. Earned f ut ure uplif t has Forw ard t rading no f iscal ef f ect on f ut ure reversals, and is not con- Unrealised gains relat ed t o f orw ard t rading in sidered w hen calculat ing t he def erred t axat ion. f oreign currency, crude oil and ref ined product s are recognised as income only t o t he ext ent t hat Norw egian Accounting Standards w hich differ such t ransact ions are made f or hedging purposes significantly from International Accounting and w here gains are of f set by unrealised losses Standards: on t he hedged object . Explorat ion expendit ures Explorat ion drilling expendit ures are charged against income as incurred. 2. Disclosures by business segments and geographic distribution Business segments Int er-group sales are recorded at est imat ed market value NOK M ILLION OPERATING EXTERNAL OPERATING FIXED REVENUE* SALES PROFIT/(LOSS) ASSETS For 1997 and at 31 December 1997: Explorat ion and product ion 45 786 25 470 15 427 59 658 Ref ining and market ing 97 449 97 330 1 301 23 777 Pet rochemicals 1 335 1 324 396 7 733 Ot her operat ions and eliminat ions (19 844) 602 (82) 6 490 Tot al 124 726 124 726 17 042 97 658 For 1996 and at 31 December 1996: Explorat ion and product ion 40 653 17 683 16 854 53 171 Ref ining and market ing 89 037 88 568 1 668 21 068 Pet rochemicals 420 416 213 6 770 Ot her operat ions and eliminat ions (23 129) 314 (501) 6 645 Tot al 106 981 106 981 18 234 87 654 For 1995 and at 31 December 1995: Explorat ion and product ion 29 961 12 957 12 302 51 938 Ref ining and market ing 72 127 72 083 402 20 580 Pet rochemicals 1 261 1 261 1 106 6 337 Ot her operat ions and eliminat ions (16 832) 216 (220) 6 560 Tot al 86 517 86 517 13 590 85 415 * Operat ing revenue includes prof it af t er t axat ion in associat ed companies. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 41

  • Page 44

    NOTES ON GROUP ACCOUNTS Geographic distribution Based on business locat ion NOK M ILLION OPERATING EXTERNAL OPERATING FIXED REVENUE SALES PROFIT/(LOSS) ASSETS For 1997 and at 31 December 1997: Norw ay 89 191 74 945 17 723 74 332 Europe (excluding Norw ay) 24 299 21 830 147 24 561 USA 26 060 25 809 (314) 6 102 Ot her 2 120 2 142 (514) 2 606 Eliminat ions (16 944) - - (9 943) Tot al 124 726 124 726 17 042 97 658 For 1996 and at 31 December 1996: Norw ay 82 355 73 566 18 336 69 465 Europe (excluding Norw ay) 20 461 18 500 243 22 021 USA 13 853 13 763 135 1 374 Ot her 1 153 1 152 (480) 1 280 Eliminat ions (10 841) - - (6 486) Tot al 106 981 106 981 18 234 87 654 For 1995 and at 31 December 1995: Norw ay 70 677 66 630 13037 66 942 Europe (excluding Norw ay) 16 159 15 168 1 002 20 531 USA 3 807 3 512 18 8 Ot her 969 1 207 (467) 1 623 Eliminat ions (5 095) - - (3 689) Tot al 86 517 86 517 13 590 85 415 3. Operating revenue analysed by product groups NOK M ILLION 1997 1996 1995 Crude oil and NGL 57 089 51 700 43 828 Pipeline t ransport 5 176 4 802 4 921 Nat ural gas 12 942 8 737 4 911 Ref ined product s 36 903 33 234 24 641 Ot her revenue 12 616 8 508 8 216 Tot al 124 726 106 981 86 517 Foreign sales, included above: Crude oil and NGL 54 072 48 747 40 870 Nat ural gas 12 838 8 737 4 498 Ref ined product s 31 414 27 615 19 581 Ot her revenue 8 187 4 642 6 120 Tot al 106 511 89 741 71 069 Tot al crude oil availabilit y includes purchased royalt y and st at e equit y crude at NOK 14 394 million. Cost of sales, NOK 67 206 million, consist s of purchased royalt y and st at e equit y crude plus ot her goods purchased f or resale. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 42

  • Page 45

    NOTES ON GROUP ACCOUNTS Operat ing revenue includes royalt ies of NOK 1 809 million. An equivalent amount is included in oper- at ing and administ rat ion cost s. The Rubicon agreement s include f arm-in and f arm-out and sw apping of a number of licence int erest s. Where such agreement s essent ially involve sw apping, no f inancial gains are recorded. Where t he cash seg- ment of t he set t lement amount s t o more t han 25 per cent of t he t ransact ion value t he sale or acquist ion is recorded separat ely and any gains are t aken t o income. Ot her revenue includes NOK 540 million in gains f rom t he Rubicon agreement s. 4. Operating and administration costs Payroll and statutory social benefits Payroll and st at ut ory social benef it s amount ed t o NOK 8 120 million in 1997 as against NOK 6 935 million in 1996 and NOK 6 311 million in 1995. Payroll cost s are charged in part t o St at oil-operat ed act ivit ies. Pension costs M ost of t he group's employees are covered by pension plans ent it ling t hem t o def ined f ut ure pension ben- ef it s. These benef it s are mainly dependent on t he number of years of t heir pensionable service, t heir f inal pensionable salary level and t he size of Nat ional Insurance benef it s. Employees in t he parent company, St at oil Norge a.s and Navion AS are insured t hrough St at oil's pen- sion f unds, w hich are organised as independent t rust s. Their asset s are invest ed in st at e, count y or munici- pal bonds, as w ell as in Norw egian shares and real est at e. Employees in subsidiaries are insured t hrough various insurance company plans. Pension cost s f or t he f inancial year and t he accrued obligat ion are calculat ed on t he basis of a st raight - line earning of pension right s. Accrued pensions are analysed as f ollow s: NOK M ILLION 1997 1996 1995 Vest ed pension benef it s earned (5 650) (4 589) (4 280) Non-vest ed early ret irement benef it s earned (576) (142) (95) Pension f unds 8 839 7 357 6 220 Unrealised ef f ect of changed est imat es 198 (111) 210 Tot al 2 811 2 515 2 055 Accrued pensions are classif ied as: Long-t erm invest ment 3 657 3 171 2 612 Ot her long-t erm liabilit ies 846 656 557 Assumed rat e of ret urn 7.5% 7.5% 7.5% Discount f act or 7.0% 7.0% 7.0% Assumed increase in salaries 4.0% 4.0% 4.0% Assumed adjust ment of t he Nat ional Insurance base rat e 3.0% 3.0% 3.0% The lat est act uarial analysis w as made in 1997. Net pension cost s are analysed as f ollow s: NOK M ILLION 1997 1996 1995 Present value of earnings f or t he period 476 353 310 Int erest cost of pension obligat ions 352 264 222 Assumed ret urn on pension f unds (596) (493) (405) Allocat ed ef f ect of changes in est imat es and dif f erence bet w een act ual and assumed ret urn 21 41 5 Pension cost s included in payroll and st at ut ory social benef it s 253 165 132 STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 43

  • Page 46

    NOTES ON GROUP ACCOUNTS 5. Investments Invest ment s include accrued pension cost s of NOK 3 657 million as show n in not e 4. 6. Exploration expenditures NOK M ILLION 1997 1996 1995 Capit alised at 1 January - IAS 3 061 2 795 2 602 Incurred during t he year 3 473 1 644 1 297 Expensed share of current year’s explorat ion (2 024) (1 170) (930) Expensed, previously capit alised (261) (107) (90) Depreciat ion (84) (105) (77) Explorat ion expendit ures sold at book value (58) Exchange adjust ment s 2 4 (7) Capit alised at 31 December - IAS 4 109 3 061 2 795 The capit alised amount at 31 December 1997 includes NOK 2 322 million in explorat ion expendit ures in areas st ill not approved f or development . Under NGAAP, explorat ion expendit ures are charged against income as incurred. 7. Property, plant and equipment NOK M ILLION M ACHINERY, PROD PROD BUILDINGS VESSELS INTAN- CONSTRUC- PROPERTY ADJUST- PROPERTY OFFICE FURNITURE, PLANT PLANT AND GIBLES TION IN PLANT M ENTS- PLANT VEHICLES, ETC OFFSHORE ONSHORE SITES PROGRESS EQUIPM (NOTE1) EQUIPM IAS NGAAP Hist orical cost at 1 Jan 1997 4 945 94 102 26 686 13 781 4 218 897 8 640 153 269 (8 295) 144 974 Addit ions 3 474 8 300 4 626 1 141 4 533 1 077 1 618 24 769 (4 240) 20 529 Delet ions at hist orical cost 250 7 242 400 1 564 873 0 14 10 343 2 147 12 490 Accumulat ed depreciat ion at 31 Dec 1997 3 968 54 124 15 264 5 301 1 125 1 519 0 81 301 (6 131) 75 170 Book value at 31 Dec 1997 4 201 41 036 15 648 8 057 6 753 455 10 244 86 394 (8 551) 77 843 Depreciat ion 1997 532 5 758 1 434 247 259 1 471 0 9 701 (526) 9 175 The book value of vessels, NOK 6 753 million, includes chart ered vessels at NOK 221 million. Depreciat ion f or 1997 includes a NOK 1 200 million w rit e-dow n of t he Connemara project on t he Irish con- t inent al shelf . Addit ions t o and proceeds f rom sale of propert y, plant and equipment (sales price) during t he last f ive years (NGAAP). NOK M ILLION 1997 1996 1995 1994 1993 Addns Sales Addns Sales Addns Sales Addns Sales Addns Sales 20 529 3 326 11 846 307 15 013 512 10 925 1 246 12 204 71 STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 44

  • Page 47

    NOTES ON GROUP ACCOUNTS 8. Financial items The net amount is analysed as f ollow s: NOK M ILLION 1997 1996 1995 Dividend received 88 73 41 Gain on sale of securit ies 392 74 89 Int erest and ot her f inancial income 559 640 625 Currency exchange adjust ment s, short -t erm it ems (539) (162) (319) Currency exchange adjust ment s, long-t erm it ems (1 564) 424 334 Int erest and ot her f inancial expenses (1 969) (1 723) (1 582) Net f inancial it ems - NGAAP (3 033) (674) (812) Change unrealised gains on securit ies 160 159 103 Change unrealised exchange gains, long-t erm it ems (660) (379) 882 Capit alised building loan int erest 480 584 926 Net f inancial it ems - IAS (3 053) (310) 1 099 9. Off balance financial derivatives Gap analysis f or f inancial derivat ives. Time gap report NOK M ILLION 0-3 M THS 3-6 M THS 6-12 M THS 1-3 YRS 3-5 YRS 5-10 YRS OVER 10 YRS TOTAL Forw ard cont ract s (56) (89) (52) (197) Int erest rat e sw aps 1 058 585 126 8 672 2 590 1 983 4 389 19 403 Currency and int erest rat e sw aps (2 932) 348 (1 627) 556 1 190 1 970 - (495) Int erest f ut ures 143 143 Nominal values by product and currency M ILLIONS USD DEM GBP ECU JPY CHF BEF DKK SEK NLG NOK Forw ard cont ract s (1 584) 436 (64) 110 9 816 9 269 (2 471) (1 249) (15 630) 11 427 Int erest rat e sw aps 1 876 325 100 200 9 500 317 Currency and int erest rat e sw aps (233) (40) 52 000 400 2 559 (483) (2 867) Int erest f ut ures 54 7 (2 000) (55) M ILLIONS FRF M YR IEP ATS ESP FIM Forw ard cont ract s (204) 17 (9) (45) (1 885) (1) Int erest rat e sw aps 250 Currency and int erest rat e sw aps (562) Interest rate derivatives Int erest rat e derivat ives in St at oil are mainly used f or asset and liabilit y management , of f and on balance. Average int erest sensit ivit y f or t he group's loans, bonds and int erest derivat ives t hroughout t he year w as NOK 70 million, based on modif ied durat ion and a parallel one per cent decline in int erest rat es. Currency derivatives St at oil makes only sporadic use of OTC currency opt ions. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 45

  • Page 48

    NOTES ON GROUP ACCOUNTS 10. Taxation Tax expenses are analysed as f ollow s: NOK M ILLION IAS NGAAP 1997 1996 1995 1997 1996 1995 Taxes payable 8 361 11 959 7 494 8 361 11 959 7 494 Def erred t ax provision 1 283 668 1 920 1 269 793 980 Taxat ion f or t he year 9 644 12 627 9 414 9 630 12 752 8 474 Uplif t benef it f or t he year 2 773 2 480 2 220 2 773 2 480 2 220 Def erred t axes are calculat ed on t he basis of t emporary dif f erences bet w een f inancial and t ax account ing values at 31 December. Prof it ret ained/loss carried f orw ard in subsidiaries is not included in t hese calcula- t ions. Uplif t earned, but not amort ised, amount s t o NOK 5.7 billion. 1997 1996 1995 NOK M ILLION BASE DEFERRED TAX BASE DEFERRED TAX BASE DEFERRED TAX Excess t ax depreciat ion 34 247 22 169 33 737 22 465 34 318 22 756 Ot her t emporary dif f erences 2 604 1 793 3 282 2 460 1 461 1 500 In accordance w it h IAS 36 851 23 962 37 019 24 925 35 779 24 256 Adjust ment s f or NGAAP: Capit alised explorat ion expendit ures and int erest (8 552) (5 390) (7 757) (5 301) (7 474) (5 266) Unrealised gains, et c (776) (444) (1 285) (832) (1 499) (998) In accordance w it h NGAAP 27 523 18 128 27 977 18 792 26 806 17 992 In connect ion w it h licence int erest s sold and sw apped, t he def erred t ax liabilit y w as reduced by NOK 2.2 billion in t he IAS and NOK 1.9 billion in t he NGAAP account s. 11. Current assets Ot her liquid asset s NOK M ILLION 1997 1996 1995 Time deposit s 5 33 21 List ed shares 1 486 1 308 664 Bonds, cert if icat es and ot her securit ies 4 046 4 714 4 576 Tot al IAS 5 537 6 055 5 261 NOK 461 million in unrealised gains at 31 December 1997 are not included in t he NGAAP account s. Ot her liquid asset s in St at oil Forsikring a.s are included at NOK 4 838 million. These f unds can only t o a limit ed ext ent be lent t o ot her companies in t he group. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 46

  • Page 49

    NOTES ON GROUP ACCOUNTS Short-term receivables Account s receivable and ot her short -t erm receivables are assessed at f ace value, less a provision f or ant ici- pat ed losses. The provision f or bad debt s at 31 December 1997 amount ed t o NOK 276 million. Stocks St ocks essent ially consist of crude oil and ref ined product s. Equit y crude is regarded as st ock on passing t he norm price point , normally w hen loaded on t he f ield. Product st ocks held in reserve by government decree are, ef f ect ive f rom 1997, assessed in accordance w it h t he Fif o principle. 12. Shares and long-term investments Associated companies NOK M ILLION BOOK SHARE IN EQUITY PAR VALUE SHARE VALUE PROFIT/(LOSS) HOLDING CAPITAL Borealis a.s 4 580 685 50% DKK 2 000 DKK 4 000 M alaysian Ref ining Company Sdn. Bhd. 704 0 15% M YR 333 M YR 2 220 Ot her companies 156 120 Tot al 5 440 805 Vot ing st ock and equit y holdings are ident ical. Shares in other companies Shares in ot her companies t ot alled NOK 1 900 million, including NOK 807 million in ordinary Saga Pet roleum ASA shares. The equit y holding in t his company is 8.7 per cent , w hile 11.6 per cent of t he vot- ing st ock is held. Shares in Haf slund ASA are included at NOK 715 million. The equit y holding is 10.0% , and t he vot ing st ock held is 16.9% . A f ive per cent shareholding in Verbundnet z Gas AG is also included at NOK 218 million. 13. Short-term debt NOK M ILLION 1997 1996 1995 Current int erest -bearing debt Short -t erm bank loans and overdraf t s 464 243 468 Ot her int erest -bearing debt 1 446 4 086 1 649 Current int erest -bearing debt 1 910 4 329 2 117 Ot her current liabilit ies, non int erest -bearing Net payable t o co-vent ures 3 009 2 537 2 210 Holiday pay, payroll and value-added t axes 2 676 2 651 2 818 Accrued liabilit ies 4 266 3 098 3 777 Ot her current liabilit ies, non int erest -bearing 9 951 8 286 8 805 STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 47

  • Page 50

    NOTES ON GROUP ACCOUNTS 14. Loans Currency positions AM OUNTS IN M ILLIONS LONG-TERM CURRENCY SWAP CURRENCY EXCHANGE BOOK VALUE LOANS AGREEM ENTS POSITION RATE NOK NOK 2 967 2 967 2 967 BEF 2 790 2 790 19.84 554 DEM 615 40 655 409.20 2 680 GBP 31 31 12.12 376 FRF 250 562 812 122.30 993 DKK 683 683 107.42 734 ECU 90 60 150 8.09 1 214 JPY 62 000 (52 000) 10 000 5.63 563 USD 2 162 233 2 395 7.32 17 531 Long-t erm loans - IAS 27 612 Unrealised currency exchange gains 269 Long-t erm loans - NGAAP 27 881 Long-t erm loans include USD 60 million in commit ment s relat ed t o f inancial leasing. The average rat e of int erest in 1997, excluding currency exchange ef f ect s, w as 5.4 per cent . Available borrow ing f acilit ies at 31 December 1997 amount t o NOK 7.2 billion. Instalment plan, long-term loans YEAR NOK M ILLION 1998 3 843 1999 1 978 2000 3 737 2001 1 355 2002 2 530 Thereaf t er 14 169 Tot al 27 612 15. Other long-term liabilities This it em includes provisions of NOK 4 410 million f or various insurance f unds in St at oil Forsikring a.s and pension obligat ions of NOK 846 million as show n in not e 4. Accrued f ut ure sit e abandonment and removal cost s of NOK 1 348 million are also included. The current year's provision amount s t o NOK 142 million. It is assumed t hat in respect of such cost s associat ed w it h t he Norw egian cont inent al shelf , a port ion equivalent t o t he parent company's average t ax rat e over t he lif e of t he inst allat ion w ill be carried by t he Norw egian st at e. STA TOI L’ S A N N UA L REPORT A N D A CCOUN TS 1 9 9 7 48

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