Statoil, Annual Report on Form 20-F 2016      1  

2     Statoil, Annual Report on Form 20-F 2016       

STATOIL AT A GLANCE

Our history

The company was founded as The Norwegian State Oil company (Statoil) in 1972, and became listed on the Oslo Børs (Norway) and New York Stock Exchange (US) in June 2001. Statoil merged with Hydro`s oil and gas division in October 2007.

Statoil is an international energy company with operations in over 30 countries. We are headquartered in Stavanger, Norway with approximately 20,500 employees worldwide. We create value through safe and efficient operations, innovative solutions and technology. Statoil’s competitiveness is founded on our values-based performance culture, with a strong commitment to transparency, cooperation and continuous operational improvement.

Our shareholders

The Norwegian State is the largest shareholder in Statoil, with a direct ownership interest of 67%. Its ownership interest is managed by the Norwegian Ministry of Petroleum and Energy. US investors hold 9.6%, Norwegian Private owners hold 8.9%, other European investors hold 7.1%, UK investors hold 5.1% and others hold 1.5%.

Our business areas

We have eight business areas:

·           Development and Production Norway

·           Development and Production International

·           Development and Production USA

·           Marketing, Midstream and Processing

·           Technology, Projects and Drilling

·           Exploration 

·           Global Strategy and Business Development

·           New Energy Solutions

Our strategy

Statoil is an energy company committed to long-term value creation in a low carbon future. Statoil will develop and maximise the value of its unique Norwegian continental shelf position, its international oil and gas business and its growing new energy business; focusing on safety, cost and carbon efficiency. Statoil is a values based company where empowered people collaborate to shape the future of energy.

Our values

Open, Collaborative, Courageous and Caring.

Our dividend  policy

It is Statoil's ambition to grow the annual cash dividend, measured in USD per share, in line with long term underlying earnings. Statoil announces dividends on a quarterly basis. In May 2016, the annual general meeting approved the introduction of a two-year scrip dividend programme commencing from the fourth quarter of 2015.  

Key figures and highlights

About the report

This document constitutes the Annual report on Form 20-F in accordance with the US Securities and Exchange Act of 1934 applicable to foreign private issuers. A cross reference to the Form 20-F requirements are set out in section 5.10 in this report. The Annual report on Form 20-F and other related documents are filed with the US Securities and Exchange Commission (the SEC).

Financial reporting terms used in this report are in accordance with International Financial Reporting Standards (IFRS) as adopted by the European union (EU) and also comply with IFRS as issued by the International Accounting Standards Board (IASB), effective at 31 December 2016. This document should be read in conjunction with the cautionary statement in section 5.7 Forward-looking statement.

The Statoil Annual report and Form 20-F may be downloaded from Statoil’s website at [Statoil.com/annualreport2016]. No other material on Statoil’s website forms any part of such document. References to this document or other documents on Statoil’s website are included as an aid to their location and are not incorporated by reference into this document. All of the SEC filings made available electronically by Statoil may be obtained from the SEC at 100 F Street, N.E., Washington D.CC. 20549, United States or on the SEC’s website at www.sec.gov . 

2.1 Strategy and market overview

Statoil’s business environment

Market overview

2016 was another year of sub-par growth, with global economic GDP growth easing from 2.6% to 2.3%. This was largely driven by the slowdown in OECD economies, with non-OECD economies gaining momentum over the year. In the United States, consumer spending remained healthy, but investment contracted and resulted in GDP growth decelerating from 2.6% in 2015 to 1.6%. Economic expansion continued at a moderate pace in the Euro-zone at 1.7%, supported by private consumption and higher employment. The economy in the United Kingdom held up well despite the EU Leave vote, while in contrast Japan logged relatively modest growth. Emerging markets maintained their growth rate from 2015, partly due to Russia heading towards economic recovery during the year. 2016 saw China's growth stabilise due to intensified stimulus efforts amidst the continued slowdown since 2012, caused by economic rebalancing. India’s GDP growth rate eased to 6.6% on the sudden demonetarisation of large currency notes that hampered consumption. Several major forces are at play in the global economy and will continue to affect demand, including relatively low commodity prices, low interest rates, increased policy uncertainty and weak world trade. 

Global oil demand grew by a healthy 1.5 mmbbl per day in 2016. Production from non-Opec countries reacted to lower prices and declined by 0.9 mmbbl, with most of the decline taking place in North America and China. However, Opec added 1.1 mmbbl per day to production. This resulted in an oversupplied market throughout 2016, with storage levels moderately increasing.

The first half of 2016 saw a downward trend in gas prices, which reflected both market balance and surrounding competitive fuels. However, in the second half of 2016, markets have strengthened due to a rebounding commodity market and demand responding to weak gas prices in the first half of 2016.

Oil prices and refining margins

Higher than usual volatility characterised the oil market in 2016 as it did in the previous year, with the price of dated Brent moving in a range between USD 26 per barrel to USD 55 per barrel.

Oil prices

The oil market is generally volatile and has been highly volatile since June 2014. The average price for dated Brent crude in 2016 was USD 43.7 per barrel, down USD 10 per barrel from 2015. The dated Brent oil price started the year on a downward trajectory and hit a low of USD 26 per barrel in the second half of January. Positive market sentiment driven by healthy demand growth and significant supply disruptions pushed the price of dated Brent up to around USD 50 per barrel by the end of second quarter. The return of disrupted volumes during the summer and signs of weakening demand growth sent prices down again towards USD 40 per barrel early in August. The price of dated Brent recovered somewhat again in the third quarter after Opec and Russia agreed to come up with a plan to freeze or cut their production. The Opec meeting in late November concluded with an agreement among the members to cut joint output by 1.2 mmbbl per day effective 1 January 2017, alongside a non-Opec cut of around 0.6 mmbbl per day. The immediate effect of this announcement was an increase in the dated Brent price towards USD 53 per barrel. The futures market for Brent at the Intercontinental Exchange (ICE) was in contango throughout 2016.

Over the course of 2016, North American tight oil has provided the largest share of non-Opec declines that offset continued growth in Opec production. While US shale production has been in decline over much of the past two years, productivity gains and cost reductions have accelerated, planting the seeds of future growth. Specifically, enhanced completions and extended-reach laterals have allowed producers to do more with less. Nowhere is this more evident than in the Permian basin of West Texas. As oil prices have increased during the course of the year, the Permian has recorded the largest rebound in drilling rigs. At current levels, the Permian basin is home to almost 50% of all oil rigs in the US, up from 30% in early 2013. From a pricing perspective, declining production, an abundance of infrastructure, and the lifting of the crude export ban have caused most North American grades to price close to their technical refining values, reflective of the ongoing de-bottlenecking of US onshore crude pipeline infrastructure. These narrow differentials relative to global waterborne crudes have caused rail loadings to fall precipitously with all indications being that this trend is set to continue in the years ahead.

Refinery margins

2016 was a solid year for European refinery margins. Through 2015, a surplus of crude oil had been converted to a surplus of products, incentivised by strong margins. By early 2016, diesel stocks were building fast and diesel margins were low. Refineries then shifted to maximise gasoline output, in expectation of a strong summer gasoline market. However, summer gasoline demand disappointed, leading to stocks building and sharply falling gasoline margins. Weak product prices through the summer led to constrained refinery throughput and supported demand. By the fourth quarter, the gasoline market rebalanced and diesel stocks fell

again. This caused refinery margins to improve again in the fourth quarter. The average margin for an upgraded refinery in North West Europe was solid and in line with 2014, but well below 2015 margins.

Natural gas prices

Natural gas prices declined throughout 2015 but stabilised in the second quarter of 2016. The fourth quarter of 2016 experienced a robust price recovery due to consumption growth in Asia and Europe. Henry Hub experienced its lowest annual price in over a decade through 2016.

Gas prices – Europe

NBP prices fell from an average of USD 7.5/MMBtu in first quarter 2015 to USD 5.4/MMBtu in fourth quarter 2015. The decline continued in first quarter 2016, averaging USD 4.3/MMBtu, before falling to a decade low of USD 3/MMBtu in August 2016. Since August’s low point, average monthly prices have strengthened, closing 2016 at USD 6.2/MMBtu and resulting in an annual 2016 average of USD 5/MMBtu.

EU gas consumption continued to grow in 2016 as power generation responded to higher priced coal and outages of nuclear reactors in France. Furthermore, heating demand has responded to a more normal European weather pattern. EU indigenous gas production held at a record low of 125 bcm as the Dutch government revised the production limit at the Groningen field down to 24 bcm. European imports from Russia were at a record high of 179 bcm and imports from Norway were at the same record level as in 2015, 108 bcm. Record levels of pipeline imports have been encouraged by a small downturn in LNG deliveries to Europe. LNG supplies into North Western Europe have diminished, whilst imports into Southern Europe remain constant.

Gas prices - North America

Gas prices were volatile in 2016, falling below USD 2/MMBtu early in the year, before rising above USD 3/MMBtu at the end of the year. The Henry Hub average of USD 2.4/MMBtu was the lowest annual price in over a decade, down from USD 2.6/MMBtu in 2015 largely as a result of oversupply. US gas producers responded to the falling prices by withdrawing rigs to the lowest level in decades. Gas production fell throughout the year as a result. Demand for gas was strong in 2016, with natural gas replacing coal in the power sector and LNG exports starting from the Gulf Coast.

Global LNG prices

LNG prices fell throughout 2015 from an average of USD 7.3/MMBtu in first quarter 2015 to USD 4.5/MMBtu in first quarter 2016, but stabilised in second quarter of 2016 at an average of USD 4.9/MMBtu.  The second half of 2016 experienced robust price recovery to average USD 8/MMBtu in fourth quarter 2016, largely due to consumption growth in Asia and the Middle East, further intensified by lower-than-expected ramp-up of new LNG facilities as well as unplanned outages.

Statoil’s corporate strategy

Statoil is an energy company committed to long-term value creation in a low carbon future. Statoil creates value by turning natural resources into energy for people and progress for society. Statoil will develop and maximise the value of its unique NCS position, its international oil and gas business and its growing new energy business, focusing on safety, cost and carbon efficiency. Statoil is a values-based company where empowered people collaborate to shape the future of energy.

To succeed in turning Statoil’s vision into reality, Statoil pursues a strategy to:

·           Deepen and prolong the NCS position

·           Grow material and profitable international positions

·           Provide energy for a low-carbon future through growth in New Energy Solutions (NES)

·           Focused and value-adding mid- and downstream

In addition, Statoil will research, develop, and deploy technology to create opportunities and enhance the value of Statoil’s current and future assets.

Deepen and prolong the NCS position

For more than 40 years, Statoil has explored, developed and produced oil and gas from the NCS. Statoil aims to deepen and prolong its position by accessing and maturing opportunities into valuable production. At the same time, Statoil plans to improve the reliability, efficiency and lifespan of fields already in production. The NCS represents approximately two thirds of Statoil’s equity production at 1,235 mboe per day in 2016.

·           Exploration:  Statoil continues to be a committed NCS explorer across mature, growth and frontier areas. In 2016, Statoil participated in 14 exploration wells on the NCS, resulting in 11 discoveries. Statoil was awarded 29 licenses in mature areas in Norway’s Awards for Predefined Areas (APA) 2016 round (result announced January 2017), 16 as operator and 13 as non-operating partner, and five licenses in frontier areas in Norway’s 23rd concession round, four as operator and one as partner  

·           Development:  The Johan Sverdrup Phase 1 project is progressing in line with schedule. Production drilling started in the first quarter of 2016. Pre-sanction for Johan Sverdrup Phase 2 is scheduled for the first quarter of 2017. Statoil increased its equity interest in the UK part of the Utgard license and submitted the Utgard Plan for Development and Operation (PDO) in the second quarter of 2016. The PDOs for Byrding and Trestakk were delivered and the PDO for Oseberg Vestflanken 2 was approved during 2016

·           Production:  Gullfaks Rimfaksdalen came on-stream. Production started at Fram C, tied into existing infrastructure in the Fram and Troll area

Statoil has completed two share transactions resulting in a 20.1 per cent equity ownership in Lundin Petroleum AB. Lundin is our partner in several fields, including a 22.6% interest in the unitised Johan Sverdrup field development. Statoil also acquired 25% of Byrding.

By the end of 2016, Statoil had achieved CO ₂ emission reductions in excess of 1 million tonnes per year compared to a 2008 baseline on the NCS, primarily through better energy management and improved energy efficiency. Our 2020 target is to deliver 1.2 million tonnes of CO ₂ emission reductions compared to 2008. In August 2016, the Norwegian petroleum industry announced its ambition to implement CO ₂ reduction measures corresponding to 2.5 million tonnes on the NCS by 2030 compared to 2020. Statoil’s commitment is to deliver 2.0 million tonnes of this CO ₂ reduction target.

Grow material and profitable international positions

International oil and gas production represented approximately one third of Statoil’s equity production at 744 mboe per day in 2016. Statoil will continue to explore, develop, and produce oil and gas opportunities outside Norway to enhance Statoil’s upstream portfolio.

·           Exploration:  Statoil continues to explore internationally for oil and gas. Statoil participated in nine exploration wells internationally, of which three were discoveries, including the Baccalieu discovery in Canada. Statoil added exploration acreage in Brazil, Canada, New Zealand, Russia, the UK and the US Gulf of Mexico, accessed exploration acreage in Ireland and Turkey and entered two new countries, Mexico and Uruguay. A joint venture comprising Statoil, BP and Total was awarded Blocks 1 and 3 in the Saline Basin in Mexico, with Statoil as the operator.  

·           Development:  Statoil strengthened its strategic partnership with Petrobras in Brazil. Construction progress continued as planned on Peregrino Phase II

·           Production:  Heidelberg and Julia production came on-stream in the US Gulf of Mexico and, along with operator BP and other partners, significant advances have been made towards the award of a licence extension for Azeri-Chirag Guneshli (ACG) in Azerbaijan. The In Salah southern fields in Algeria and the Corrib field in Ireland both had major ramp-ups in 2016

In Brazil, Statoil acquired a 66% interest in and became the operator license of BM-S-8, which contains a substantial part of the Carcará field. Operatorship was assumed and appraisal activities began on BM-C-33. In the US, Statoil increased its stake in the Eagle Ford field and assumed full operatorship. Statoil continued to focus its portfolio with a partial divestment of non-core Marcellus acreage and agreeing the sale of its oil sands business in Canada.

Provide energy for a low-carbon future
Statoil recognises that opportunities are increasingly available in producing low carbon energy.

In 2016 Statoil launched Statoil Energy Ventures, a USD 200 million venture capital fund dedicated to investing in attractive and ambitious growth companies in renewable energy. This fund made its first investments in United Wind Inc. and later in ChargePoint Inc., Convergent Energy and Power Inc. and Oxford Photovoltaics Ltd., and is continuing to evaluate market opportunities. Statoil has also continued to explore new business opportunities in carbon capture and storage as well as other potential new energy markets.

·           Development:  The 402 MW Dudgeon Offshore Wind Park development started installation in the first quarter of 2016 and is expected to be fully commissioned by the fourth quarter of 2017

·           Production:  In 2016, Statoil signed a letter of intent to become operator of the Sheringham Shoal Offshore Wind Farm in January 2017; it currently produces from an installed capacity of 317 MW. Statoil has a 40% ownership stake of the Scira consortium which produces electricity from the Sheringham Shoal wind park

Statoil partnered with E.ON to develop the 385 MW Arkona wind farm offshore Germany, with start-up planned for 2019. In the US, Statoil was declared the provisional winner of the US government’s wind lease sale offshore New York, with a potential generation capacity of more than 1.8 GW.

Statoil will also start production from the world's first floating windfarm, Hywind Scotland, in the fourth quarter of 2017. Statoil's partner in the 30 MW project is Masdar, which acquired 25% of the project in January 2017. The project will also include an innovative battery storage solution, Batwind, which represents the company's first wind development with integrated energy storage. 

Statoil has delivered a feasibility study to the Norwegian government for part of a Norwegian carbon capture and storage (CCS) value chain. The scope has been to find commercial methods to inject CO ₂ volumes arriving via ship into an underground reservoir on the NCS. Statoil’s long experience with CO ₂ storage from Sleipner and Snøhvit has been valuable, finding commercial and technical means to store large volumes of third party CO ₂ in order to accommodate the world’s need for CCS solutions. 

Focused and value-adding mid- and downstream

The prime objective for Statoil’s mid- and downstream activities is to process and transport its oil and gas production (including the Norwegian State’s petroleum) competitively to premium markets, securing maximum value realisation. The main focus is on:

·           Safe and efficient operations

·           Continuous improvement in operational regularity, HSE and costs

·           Flow assurance and marketing of Statoil’s equity production (crude oil, natural gas, related products) and the State’s Direct Financial Interest (SDFI) volumes for maximum value creation

·           Utilisation of the Asset Backed Trading model across commodities to capture margin opportunities

·           Maintaining Statoil’s position as a leading European gas supplier

·           A capital lean asset structure

Strategic focus is directed at optimising the value of Statoil’s flexible Norwegian gas production assets that supply Europe and at Statoil’s midstream activities in North America, where Statoil’s onshore portfolio is developing. Statoil achieved strong marketing trading results across all commodities.

Research, development, and deployment of technology to unlock opportunities and enhance value
Statoil believes that technology is a critical success factor for value creation. Statoil’s technology development activities aim to increase access to new oil and gas resources at competitive cost, reduce field development, drilling and operating costs, and CO ₂ and other greenhouse gas emissions. Statoil’s technology efforts focus on the following priority areas:

·           Business-critical technologies: Upstream technologies are prioritised, primarily in the areas of Exploration, Reservoir, Drilling and Well, and Subsea Production Systems. Statoil’s main focus has been on cost reduction, for example Statoil’s simplified subsea production concept Cap-X ^TM has been developed to enable possible future development projects in the Barents Sea

·           Strengthening Statoil’s licence to operate: Statoil has strengthened its commitment to sustainability. For the oil & gas and new energy value chains, technology development is concentrated on increased energy efficiency for power generation and reduced CO ₂ emissions. For renewables, technological improvements to reduce cost in the areas of construction and maintenance for both fixed and floating offshore wind applications is a priority

·           Expanding Statoil’s capabilities: Statoil continues its broader research efforts for both the oil and gas value chain and new value chains. Work is conducted both in-house and in collaboration with academia, research institutes and suppliers and through venture activities

·           Capturing the value of digitalisation: Statoil is exploring the opportunities of digitalisation in the energy industry. In 2016, the focus has been determining the optimal approach to accelerate digitalisation to capture a greater value potential

At the capital markets update (CMU) on 7 February 2017, Statoil shared its sharpened strategy to respond to the changing business context. Geopolitical shifts, challenges in accessing new oil and gas resources, changing market dynamics, digitalisation and a global transition towards a low carbon economy are increasing uncertainty and volatility. This change in outlook drives the need to build a more resilient, diverse and option-rich portfolio, delivered by an agile organisation that embraces change and empowers its people. To deliver on the sharpened strategy and fulfill the strategic intent of “high value, low carbon”, Statoil will continue to build opportunities to optimise its portfolio around the following pillars:

·           Norwegian continental shelf – Build on unique position to maximise and develop long-term value

·           International Oil & Gas – Focus geographically to deepen core areas and develop growth options

·           New Energy Solutions – Create a new material industrial position

·           Midstream and Marketing – Secure market access and grow value creation through cycles

The following strategic principles guide Statoil in shaping a robust, balanced and distinct portfolio:

1.      Cash generation capacity

Generating positive cash flows from operations, even at low oil and gas prices, in order to sustain dividend and investment capacity through the cycle. 

2.      Capex flexibility

Having sufficient flexibility in organic capital expenditure to be able to respond to market downturns and avoid value destructive decisions.

3.      Capture value from cycles

Ensuring the ability and capacity to act counter-cyclically to capture value through the cycles.

4.      Low-carbon advantage

Maintaining competitive advantage as a leading company in carbon efficient oil and gas production, while building a low carbon business to capture new opportunities in the energy transition.

Group outlook

Statoil’s plans address the current environment while continuing to invest in high-quality projects. Statoil continues to reiterate its efforts and commitment to deliver on its priorities of high value creation, increased efficiency and competitive shareholder return.

·           Organic capital expenditures for 2017 (i.e. excluding acquisitions, capital leases and other investments with significant different cash flow pattern) are estimated at around USD 11 billion

·           Statoil intends to continue to mature its large portfolio of exploration assets and estimates a total exploration activity level of around USD 1.5 billion for 2017, excluding signature bonuses

·           Statoil expects to achieve an additional USD 1 billion in efficiency improvements in 2017 for a total of USD 4.2 billion

·           Statoil’s ambition is to keep the unit of production cost in the top quartile of its peer group

·           For the period 2016 – 2020, organic production growth is expected to come from new projects resulting in around 3% CAGR (Compound Annual Growth Rate)

·           The equity production for 2017 is estimated to be around 4-5% above the 2016 level

·           Scheduled maintenance activity is estimated to reduce quarterly production by approximately 10 mboe per day in the first quarter of 2017. In total, maintenance is estimated to reduce equity production by around 30 mboe per day for the full fiscal year 2017, which is lower than the 2016 impact

·           Indicative effects from Production sharing agreements (PSA-effect) and US royalties are estimated to be around 150 mboe per day in 2017 based on an oil price of USD 40 per barrel and 165 mboe per day based on an oil price of USD 70 per barrel

·           Deferral of production to create future value, gas off-take, timing of new capacity coming on stream and operational regularity represent the most significant risks related to the foregoing production guidance

These forward-looking statements reflect current views about future events and are, by their nature, subject to significant risks and uncertainties because they relate to events and depend on circumstances that will occur in the future. For further information, see section 5.7 Forward-Looking Statements.

2.2 BUSINESS OVERVIEW

History

O n 18 September 1972 , Statoil was formed by a decision of the Norwegian parliament and incorporated as a limited liability company under the name Den norske stats oljeselskap AS. Being a company owned 100% by the Norwegian State, Statoil's initial role was to be the government's commercial instrument in the development of the oil and gas industry in Norway. Growing in parallel with the Norwegian oil and gas industry, Statoil’s operations have primarily been focused on exploration, development and production of oil and gas on the Norwegian continental shelf (NCS).

During the 1980s, Statoil grew substantially through the development of the NCS. Statoil also became a major player in the European gas market by entering into large sales contracts for the development and operation of gas transport systems and terminals. During the same decade, Statoil was involved in manufacturing and marketing in Scandinavia and established a comprehensive network of service stations. This line of business was fully divested in 2012.

In 2001, Statoil was listed on the Oslo and New York stock exchanges and became a public limited company under the name Statoil ASA, 67% majority owned by the Norwegian State. Since then, substantial investments both on the NCS and internationally, have grown our business. The merger with Hydro's oil and gas division on 1 October 2007 further strengthened Statoil’s ability to fully realise the potential of the NCS. Enhanced utilisation of expertise to design and manage operations in various environments have expanded our upstream activities outside our traditional area of offshore production. This includes the development of heavy oil and shale gas projects and projects that focus on other forms of energy, such as offshore wind and carbon capture and storage.

Activities

Statoil is an international energy company primarily engaged in oil and gas exploration and production activities, organised under the laws of Norway and subject to the provisions of the Norwegian Public Limited Liability Companies Act. In addition to being the leading operator on the Norwegian continental shelf (NCS), Statoil has also substantial international activities and is present in several of the most important oil and gas provinces in the world. Our activities span operations in more than 30 countries and employs approximately 20,500 employees worldwide.

Our access to crude oil in the form of equity, governmental and third party volumes makes Statoil a large seller of crude oil, a nd Statoil is the second-largest supplier of natural gas to the European market. Processing and refining are also part of our operations.

Statoil’s registered office is at Forusbeen 35, 4035 Stavanger, Norway and the telephone number of its registered office is +47 51 99 00 00.

Our competitive position

Key factors affecting competition in the oil and gas industry are oil and gas supply and demand, exploration and production costs, global production levels, alternative fuels, and environmental and governmental regulations. When acquiring assets and licences for exploration, development and production and in refining, marketing and trading of crude oil, natural gas and related products, Statoil competes with other integrated oil and gas companies.

Statoil's ability to remain competitive will depend, among other things, on continuous focus on reducing costs and improving efficiency. It will also depend on technological innovation to maintain long-term growth in reserves and production and the ability to seize opportunities in new areas.

The information about Statoil's competitive position in the strategic report is based on a number of sources; e.g. investment analyst reports, independent market studies, and our internal assessments of our market share based on publicly available information about the financial results and performance of market players.

Improvement programmes

Improvement programmes are Statoil’s response to the industrial challenge that has emerged over the recent years characterised by reducing prices for our products and declining returns. More specifically, the ambition is to realise positive production effects and capex and operating cost savings to improve financial results and cash-flows. For 2017 Statoil targets additional annual efficiency improvements of USD 1 billion on top of the already achieved USD 3.2 billon.

CORPORATE STRUCTURE

Business areas

Statoil's operations are managed through the following business areas:

Development and Production Norway (DPN)

DPN manages Statoil’s upstream activities on the Norwegian continental shelf (NCS) and explores for and extracts crude oil, natural gas and natural gas liquids. The business area’s ambition is to continue Statoil’s leading position on the NCS and ensure maximum value creation through continuously improved HSE and operational performance.

Development and Production International (DPI)

DPI manages Statoil’s worldwide upstream activities that are not included in the DPN and Development and Production USA (DPUSA) business areas. It explores for and extracts crude oil, natural gas and natural gas liquids. DPI's ambition is to build a large and profitable international production portfolio comprising activities ranging from accessing new opportunities to delivering on profitable projects in a range of complex environments.

Development and Production United States (DPUSA)

DPUSA manages Statoil’s upstream activities in the USA and Mexico. DPUSA's ambition is to develop a material and profitable position in the US and Mexico, including the deep water regions of the Gulf of Mexico and unconventional oil and gas in the US.

Marketing, Midstream and Processing (MMP)

MMP manages Statoil’s marketing and trading activities related to oil products and natural gas, transportation, processing and manufacturing, and the development of oil and gas. MMP seeks to maximise value creation in Statoil's midstream and marketing business.

Technology, Projects and Drilling (TPD)

TPD is accountable for the global project portfolio, well deliveries, new technologies and sourcing across Statoil. TPD seeks to provide safe and secure, efficient and cost-competitive global well and project delivery, technological excellence, and research and development. Cost-competitive procurement is an important contributory factor for maximising value for Statoil.

Exploration (EXP)

EXP manages Statoil’s worldwide exploration activities with the aim of positioning Statoil as one of the leading global exploration companies and this is achieved through accessing high potential new acreage in priority basins, globally prioritising and drilling more significant wells in growth and frontier basins, delivering near-field exploration on the NCS and other select areas, and achieving step-change improvements in performance.

New Energy Solutions (NES)

NES reflects Statoil’s  long-term goal to complement our oil and gas portfolio with profitable renewable energy and other low-carbon energy solutions. NES is responsible for wind farms, carbon capture and storage as well as other renewable energy and low-carbon energy solutions.

Global Strategy and Business Development (GSB)

GSB sets the corporate strategy, business development and merger and acquisition activities for Statoil. The ambition of the GSB business area is to closely link corporate strategy, business development and merger and acquisition activities to actively drive Statoil's corporate development.

Reporting segments

Statoil reports its business in the following reporting segments:

·           DPN reporting segment - Development and Production Norway – the DPN business area

·           DPI reporting segment - Development and Production International , which combines the DPI and the DPUSA business areas

·           MMP reporting segment - Marketing, Midstream and Processing – the MMP business area

·           Other – which includes activities in NES, TPD, GSB and Corporate staffs and support functions

Activities relating to the EXP business area are fully allocated to - and presented in - the relevant development and production reporting segment. Activities relating to the TPD and GSB business areas are partly allocated to - and presented in - the relevant development and production reporting segments.

Presentation

In the following sections in the report, the operations are reported according to the reporting segment. Underlying activities or business clusters are presented according to how the reporting segment organises its operations.

See note 3 Segments  to the Consolidated financial statements for further details.

As required by the SEC, Statoil prepares its disclosures about oil and gas reserves and certain other supplementary oil and gas disclosures based on geographic areas. Statoil’s geographical areas are defined by country and continent and consist of Norway, Eurasia excluding Norway, Africa, and the Americas.

SEGMENT REPORTING

Internal transactions in oil and gas volumes occur between our reporting segments before being sold in the market. The pricing policy for internal transfers is based on estimated market prices. See Production volumes and prices in section 2.8 Operating and financial performance for further information.

We eliminate intercompany sales when combining the results of reporting segments. Intercompany sales include transactions recorded in connection with our oil and natural gas production in the DPN or the DPI business areas and also in connection with the sale, transportation or refining of our oil and natural gas production in the MMP business area. Certain types of transportation costs are reported in both the MMP and the DPUSA business areas.

The DPN business area produces oil and natural gas which is sold internally to the MMP business area. A large share of the oil produced by the DPI and DPUSA business areas is also sold through the MMP business area. The remaining oil and gas from the DPI and the DPUSA business areas is sold directly in the market. For intercompany sales and purchases, Statoil has established a market-based transfer pricing methodology for the oil and natural gas that meets the requirements as to applicable laws and regulations.

In 2016, the average transfer price for natural gas was USD 3.42 per mmbtu. The average transfer price was USD 5.17 per mmbtu in 2015 and USD 6.55 in 2014. For oil sold from DPN to MMP, the transfer price is the applicable market-reflective price minus a cost recovery rate.

The following table shows certain financial information for the four reporting segments, including intercompany eliminations for each of the years in the three-year period ending 31 December 2016. For additional information please refer to note 3 Segments to the Consolidated financial statements.

The following tables show total revenues by country.

RESEARCH AND DEVELOPMENT

Statoil is a technology-intensive company and research and development is an integral part of our strategy. Our technology strategy is about prioritising technology for value creation that enables us to achieve growth and access, and sets the direction for technology development and implementation for the future. Our focus is on low cost, low carbon solutions and re-using standardised technologies.

We continuously research, develop and deploy innovative technologies to create opportunities and enhance the value of Statoil’s current and future assets. Statoil’s technology development activities aim to reduce field development, drilling and operating costs, and CO ₂ and other greenhouse gas emissions. We utilise a range of tools for the development of new technologies:

·           In-house research and development (R&D)

·           Cooperation with academia and research institutes

·           Collaborative development projects with our major suppliers

·           Project related development as part of our field development activities

·           Direct investment in technology start-up companies through our Statoil Technology Invest venture activities

·           Invitation to open innovation challenges as part of  Statoil Innovate

Research and development expenditures were USD 298 million, USD 344 million and USD 476 million in 2016, 2015 and 2014, respectively.

2.3 DPN - DEVELOPMENT AND PRODUCTION NORWAY

OVERVIEW

The Development and Production Norway (DPN) reporting segment is responsible for field development and operations on the Norwegian continental shelf (NCS) which includes the North Sea, the Norwegian Sea and the Barents Sea. DPN aims to ensure safe and efficient operations and to maximise the value potential from the NCS. For proved reserves development see Development of reserves in Proved oil and gas reserves in section 2.8 Operating and financial performance.

Key events and portfolio developments in 2016:

·           In January, Statoil announced the acquisition of 11.93% of the shares and votes in Lundin Petroleum AB (Lundin) for a total cash purchase price of SEK 4.6 billion (USD 0.5 billion), and in May, Statoil announced divestment of its entire 15% interest in Edvard Grieg for an increased shareholding in Lundin. The transaction also included divestment of a 9% interest in the Edvard Grieg oil pipeline and a 6% interest in the Utsira High gas pipeline, and in addition payment of cash consideration of USD 64 million to Lundin. Statoil now owns 20.1% of the shares in Lundin.

·           On 1 March, the drilling of the first well of the Johan Sverdrup field development commenced.

·           On 12 March, the Goliat field came on stream with Eni Norge as operator.

·           In June, the plan for development and operation for Oseberg Vestflanken 2 was approved by the Ministry of Petroleum and Energy.

·           In June, the Njord Future project was established to secure long-term production for both the Njord and Hyme fields. The Njord field was temporarily shut in, and both the Njord A and Njord B platforms were towed to shore.

·           On 9 August, Statoil and its partners submitted the plan for development and operation for the Utgard gas and condensate discovery to the Norwegian and UK authorities. The plan for development and operation was approved on 17 January 2017.

·           On 19 August, Statoil and its partners submitted the plan for development and operation of the Byrding oil and gas discovery. On 30 December, Statoil completed the acquisition of Wintershall’s 25% interest in Byrding, increasing Statoil’s interest to 70%. The plan for development and operation of the Byrding discovery was approved on 17 January 2017.

·           Gullfaks Rimfaksdalen started production ahead of schedule on 24 August.

·           Volve ceased production on 17 September.

·           The plan for development and operation of the Trestakk discovery was submitted on 1 November.

·           On 24 December, the Ivar Aasen field came on stream with Aker BP as operator.

Fields in production on the NCS

The following table shows DPN's average daily entitlement for the years ending 31 December 2016, 2015 and 2014.

Production level maintained by new fields and new wells from existing fields. See chapter "Fields under development on the NCS" for future production replacement.

The following tables show the NCS production by fields in which Statoil was participating during the year ended 31 December 2016.

1)  PL089 expires in 2024 and PL057 expires in 2018 (prolonged from 2016 to 2018).

2)  PL134D expires in 2027 and PL199 expires in 2033.

3)  PL092 expires in 2020 and PL121 expires in 2022.

4)  PL095 expires in 2024 and PL124 expires in 2025.

5)  PL052 expires in 2020 and PL053 in 2031.

6)  PL348 expires in 2029.

7)  PL107 expires in 2021 and PL132 expires in 2023.

8)  PL037 expires in 2026 and PL089 expires in 2024.

9)  PL120B expires in 2034 and PL050DS expires in 2023.

10)  PL034 expires in 2020. PL053 expires in 2031 and PL190 in 2032.

11)  PL037 expires in 2026 and PL089 expires in 2024.

12)  PL209/250 expires in 2041 and PL208 expires in 2040.

13)  PL212/262 expires in 2033 and PL159 expires in 2029.

Main producing fields on
the NCS

Statoil operated fields

Troll is both the largest gas field on the NCS and a major oil field. The Troll field regions are connected to the Troll A, B and C platforms. Troll gas is mainly exported and produced at Troll A, while oil is mainly produced at Troll B and C. Fram and Fram H Nord are tie-ins to Troll C.

The Åsgard field includes the Åsgard A production and storage ship for oil, the Åsgard B semi-submersible floating production platform for gas, and the Åsgard C storage vessel for condensate. In 2015 Statoil started the world first subsea gas compressor train

on Åsgard, and the second train was started in February 2016. Mikkel and Morvin are tie-ins to Åsgard. The Trestakk development will be a tie-in to Åsgard A with production start planned in 2019.

Gullfaks has been developed with three large concrete production platforms. Since production started on Gullfaks in 1986, several satellite fields have been developed with subsea wells that are remotely controlled from the Gullfaks A and C platforms.

The Oseberg area includes the Oseberg Field Centre, Oseberg C, Oseberg East and Oseberg South production platforms. Oil and gas from the satellites are transported to Oseberg Field Centre for processing and transportation.

Kvitebjørn is a gas and condensate field developed with an integrated accommodation, drilling and processing facility with a steel jacket.

Visund is an oil and gas field that includes a floating drilling, production and living quarter unit and two subsea templates.

Partner-operated fields

Ormen Lange operated by Shell, is a deepwater gas field in the Norwegian Sea. The well stream is transported to an onshore processing and export plant at Nyhamna.

Skarv is an oil and gas field located in the Norwegian Sea, with BP as operator. The field development includes a floating production, storage and offloading vessel (FPSO) and five subsea multi-well installations.

Goliat   is the first oil field to be developed in the Barents Sea. The field is being developed by means of 22 subsea wells tied back to a circular floating production, storage and offloading vessel (FPSO). The oil is offloaded to shuttle tankers. The Goliat field is operated by Eni and started production 12 March 2016.

Ekofisk is operated by ConocoPhillips. It consists of the Ekofisk, Tor, Eldfisk and Embla fields. The Eldfisk II project delivered a new PDQ platform early 2015 that will serve as Eldfisk field center.

Marulk is operated by Eni. It is a gas- and condensate field developed as a tie-back to the Norne FPSO.

Ivar Aasen   is an oil and gas field located in the North Sea. The development includes a fixed steel jacket with partial processing and living quarters tied in as a satellite to Edvard Grieg for further processing and export. The Ivar Aasen development is operated by Aker BP ASA and started production 24 December 2016.

Exploration on the NCS

Statoil holds exploration acreage and actively explores for new resources in all three regions on the NCS, the Norwegian Sea, the North Sea and the Barents Sea.

In 2016 Statoil was awarded five licences (four as operator) in the 23 ^rd concession round for frontier areas, 29 licences (16 as operator) in the Awards for Predefined Areas (APA) round 2016 for mature areas and completed several farm-in transactions with other companies, notably in the Barents Sea.

Throughout 2016, as part of the industry initiative Barents Sea Exploration Collaboration (BaSEC), Statoil have been preparing for a drilling campaign of five to seven wells in the Barents Sea that will commence in 2017,

In 2016 Statoil completed a six well appraisal campaign of the Krafla discovery in the North Sea and made five new discoveries. The campaign set a record in drilling efficiency, with the Beerenberg well taking only nine days from spud to reaching total depth of 2,694 meters below the seabed.

In 2016 Statoil and its partners completed 14 exploratory wells and made 11 discoveries in Norway. In 2017 Statoil expects to complete 16 to18 exploration wells on the NCS, with the Barents Sea campaign being at the core of the activity plan.

Fields under development on the NCS

Statoil’s major development projects on the NCS as of 31 December 2016:

Johan Sverdrup (Statoil 40.03%, operator, with additional 4.54% indirect interest held through Lundin)   is an oil discovery in the North Sea. A plan for development and operation was submitted in February 2015 and approved by the Norwegian authorities in August 2015. Phase 1 of the development will consist of 35 production and water injection wells and a field centre with four platforms: A living quarter platform, a wellhead platform with permanent drilling facility, a processing platform and a riser and utility platform. Crude oil will be exported to Mongstad through a 274 km long dedicated pipeline, and gas will be exported to the gas processing facility at Kårstø through a 156 km long pipeline via a subsea connection to the Statpipe pipeline. On 1 March 2016, the drilling of the first well of the Johan Sverdrup field development commenced. Production is expected to start in 2019.

Aasta Hansteen   (Statoil 51%, operator) is a deep water gas discovery in the Norwegian Sea. The field development concept includes three subsea templates tied in to a floating processing unit with gas export through a new pipeline, Polarled, to Nyhamna and further exportation through the Langeled pipeline. The Aasta Hansteen processing unit can also serve as a hub for other potential discoveries in the area. On 9 January 2016, the living quarter was lifted onto the topside, which is under construction in South Korea. On 27 July 2016, the final megablock was lifted onto the substructure in South Korea. Production is expected to start in 2018.

Gina Krog   (Statoil 58.7%, operator) is an oil and gas discovery in the North Sea. The field development concept includes a steel-jacket platform and a total of 15 wells. Oil will be exported via offshore loading from a floating storage unit. Due to the high condensate content, the rich gas will be exported via Sleipner, where it will be further processed. The development concept also includes gas injection in order to maximise the recovery factor for the field. On 20 July 2015, the drilling of the first well of the Gina Krog field development commenced, and the drilling operations continued in 2016. On 23 August 2016, all the topside modules had been lifted in place, and the Gina Krog platform was complete in the field. Production is expected to start in 2017.

The Utgard development (Statoil 38.44% interest in the Norwegian and 38% in the UK sector, operator) will include two wells in a standard subsea concept, with one drilling target on each side of the UK-Norwegian maritime border . Gas and condensate will be piped through a new pipeline to the Sleipner field for processing and further transportation to market. On 17 January 2017, the plan for development and operation and the field development plan were approved by Norwegian and UK authorities. Production is expected to start in 2019.

The Trestakk discovery (Statoil 59.1%, operator) will be developed with five wells, three producers and two injectors, to be tied in to the Åsgard A installation for processing, measurement and gas injection. On 1 November, 2016, Statoil, on behalf of the licensees, submitted the plan for development and operation.  Production is expected to start in 2019.

Oseberg Vestflanken 2 (Statoil 49.3%, operator) is the development of the oil and gas structures Alfa, Gamma and Kappa. The well stream will be routed to the Oseberg field centre through a new pipeline. The plan for development and operation was approved by the Ministry of Petroleum and Energy in June, 2016. The discoveries will be developed using an unmanned wellhead platform. Production is expected to start in 2018.

Gullfaks C subsea compression (Statoil 51%, operator) , an increased gas recovery project for the Gullfaks Sør Brent reservoir, includes the installation of a subsea compressor solution in the vicinity of the L/M template in order to prolong the gas production plateau at Gullfaks C and increase the recoverable reserves from the Gullfaks Sør Brent reservoir. The compressor is expected to come on stream in 2017.

Byrding (Statoil 70%, operator)   will be developed as a subsea installation with one well drilled from an existing template on Fram H-Nord. On 17 January 2017, the Norwegian Ministry of Petroleum and Energy approved the plan for development and operation. Production is expected to start in 2017.

Troll B gas module (Statoil 30.58%, operator), a new gas module being installed to increase the processing capacity at Troll B, was sanctioned in September 2016, and is expected to be brought on stream in 2018.

Martin Linge   (Statoil 19%) is an oil and gas field operated by Total, near the British sector of the North Sea. The reservoir is complex with gas under high pressure and high temperatures. The development includes a fixed steel jacket platform with processing and export facilities, with electric power to be supplied from Kollsnes. The operator expects production to start in 2018.

Decommissioning on the NCS

Under the Petroleum Act, the Norwegian government has imposed strict procedures for removal and disposal of offshore oil and gas installations. The Convention for the Protection of the Marine Environment of the Northeast Atlantic (OSPAR) stipulates similar procedures.

Huldra ceased production in September 2014, after 13 years in production. The permanent plugging and abandonment of wells has been ongoing in 2016 with removal of topside facilities planned in 2019.

Volve ceased production in September 2016, after more than eight years in production. The permanent plugging of wells was finalised during 2016, and the removal of subsea templates is expected to be completed in 2017.

During 2016, there were permanent plugging and abandonment operations at Statfjord, Visund, Tune, Kristin and Heimdal. The partner-operated field Ekofisk also had ongoing removal and plugging activities.

For further information about decommissioning, see note 2 Significant accounting policies to the Consolidated financial statements.

2.4 DPI - DEVELOPMENT AND PRODUCTION INTERNATIONAL

DPI overview

Statoil is present in several of the most important oil and gas provinces in the world. The Development and Production International (DPI) reporting segment covers all development and production of oil and gas outside the Norwegian continental shelf (NCS).

DPI is present in more than 20 countries and had production in 11 countries in 2016 . DPI produced 38% of Statoil's total equity production of oil and gas in 2016. For information about proved reserves development see section 2.8 Proved oil and gas reserves.

The map shows the countries where DPI has activity.

Key events and portfolio developments in 2016 and early 2017:

·           In January, the Heidelberg field achieved first oil. The field is located in the Green canyon area of the Gulf of Mexico with Anadarko as the operator. Discovery was made in 2009, and sanctioning took place in 2013

·           Operations at the In Salah Southern Fields project in Algeria started in March

·           In April, the Julia field achieved first oil, on time and under budget. Julia is located in the Walker Ridge area of the Gulf of Mexico near Jack and St Malo. ExxonMobil is the operator

·           In May, Statoil divested its operated acreage in the Marcellus West Virginia to EQT Corporation for USD 407 million in cash. The transaction was completed in July

·           In July, Statoil announced acquisition of Petrobras’ 66% operated interest in the offshore licence BM-S-8 in Brazil’s Santos Basin. This licence contains a substantial part of the Carcará pre-salt oil discovery. The transaction was completed in November

·           The third processing train on the In Amenas field in Algeria, which was damaged in the January 2013 terrorist attack, restarted in July, and the In Amenas Gas Compression project came into operation in February 2017. The compression project has enabled increased production and thereby capacity to utilize all three trains 

·           In December, the drilling of the first well of the Mariner field development commenced

·           In December, Statoil increased its ownership in the deep-water Vito discovery from 30.0% to 36.89%, after exercising pre-emption rights on the Freeport-McMoran sale to Anadarko. The field is located in the Mississippi Canyon area. A final investment decision is expected in 2018 with first production in 2021

·           In December, on request of US authorities, Statoil has become operator of record for blocks MC941  and MC942  in the Gulf of Mexico following the bankruptcy of Bennu Oil & Gas LLC. With the bankruptcy proceedings still ongoing, the full implications for Statoil are still to be determined

·           In 2016, Statoil completed transactions to increase its equity interest to 100% in the UK continental shelf licence (P312) of the Utgard field, which spans the UK-Norway maritime border.  In March 2016, Statoil’s purchase of a 31% equity interest from Talisman Sinopec North Sea Limited was completed, and in June the purchase of a 45% operated equity share from JX Nippon was completed. In January 2017, the plan for development and operation for the Utgard field was approved by the Norwegian and UK authorities. For more information, see Fields under development on the NCS in section 2.3 DPN – Development and production Norway

·           In December, Statoil signed an agreement to divest its 100% owned Kai Kos Dehseh (KKD) oil sands projects in the Canadian province of Alberta to Athabasca Oil Corporation. The transaction covers the producing Leismer demonstration plant and the undeveloped Corner project, along with a number of midstream contracts associated with Leismer’s production. Following this transaction, Statoil will no longer own or operate any oil sands assets. As part of the transaction, Statoil will own just below 20% of Athabasca’s shares, and this will be managed as a financial investment. The transaction was completed 31 January 2017. For more information about the transaction see note 4 Acquisitions and disposals to the Consolidated financial statements.

International production

Statoil's entitlement production outside Norway was about 32% of Statoil's total entitlement production in 2016.

The following table shows DPI's average daily entitlement production of liquids and natural gas for the years ending 31 December 2016, 2015 and 2014 . Entitlement production volumes are Statoil’s share of the volumes distributed to the partners according to production sharing agreement (PSA) ( see section 5.6   Terms and abbreviations ). For US assets entitlement production is expressed net of royalty interests. For all other countries royalties paid in-cash are included in entitlement production and royalties payable in-kind are excluded.

The table below provides information about the fields that contributed to production in 2016