Equinor ASA – Annual report – 31 December 2023
Industry: oil and gas
Accounting judgement and key sources of estimation uncertainty
The preparation of the Consolidated financial statements requires management to make accounting judgements, estimates and assumptions.
Information about judgements made in applying the accounting policies that have the most significant effects on the amounts recognised in the Consolidated financial statements is described in the following notes:
Note 6 – Acquisitions and disposals
Note 7 – Total revenues and other income
Note 25 – Leases
Estimates used in the preparation of these Consolidated financial statements are prepared based on customised models. The assumptions on which the estimates are based rely on historical experience, external sources of information and various other factors that management assesses to be reasonable under the current conditions and circumstances. These estimates and assumptions form the basis of making the judgements about carrying values of assets and liabilities when these are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an on-going basis considering the current and expected future set of conditions.
Equinor is exposed to several underlying economic factors affecting the overall results, such as commodity prices, foreign currency exchange rates, market risk premiums and interest rates as well as financial instruments with fair values derived from changes in these factors. The effects of the initiatives to limit climate changes and the potential impact of the energy transition are relevant to several of these economic assumptions. In addition, Equinor’s results are influenced by the level of production, which in the short term may be influenced by, for instance, maintenance programmes. In the long-term, the results are impacted by the success of exploration, field developments and operating activities.
The most important matters in understanding the key sources of estimation uncertainty are described in
each of the following notes:
Note 3 – Climate change and energy transition
Note 11 – Income taxes
Note 12 – Property, plant and equipment
Note 13 – Intangible assets
Note 14 – Impairments
Note 23 – Provisions and other liabilities
Note 26 – Other commitments, contingent liabilities and contingent assets
Note 3. Climate change and energy transition
Risks arising from climate change and the transition to a lower carbon economy
Policy, legal, regulatory, market and technology developments related to climate change, can affect Equinor’s business plans and financial performance. Shifts in stakeholder focus between energy security, affordability and sustainability add uncertainty to delivery and outcomes associated with Equinor’s strategy. In its long-term planning, Equinor analyses how the global energy markets may develop, such as future changes in demand for Equinor’s products (oil, gas and power in key markets). Commodity price sensitivities are presented in a table below, including the World Energy Outlook 2023 (WEO) scenarios presented by International Energy Agency (IEA), and in note 14 Impairments. Equinor assesses climate risk from two perspectives: transition risk, which relates to the financial robustness of the company’s business model and portfolio in various decarbonisation scenarios; and physical climate risk, which relates to the exposure and potential vulnerability of Equinor’s assets to climate-related perils in different climate change scenarios. Equinor’s net-zero strategy and climate related ambitions are responses to the challenges and opportunities presented by the energy transition. Below is a summary of relevant risks and risk adjusting actions:
Impact on Equinor’s financial statements
CO₂-cost and EU ETS carbon credits
Equinor’s oil & gas operations in Europe are part of the EU Emission Trading System (EU ETS). Equinor buys EU ETS allowances (quotas or carbon credits) for the emissions related to its oil & gas production and processing. Currently Equinor receives a share of free quotas according to the EU ETS regulation, according to which free quotas are to be phased out by 2035.
Accounting policies
Cost of CO₂ quotas
Purchased CO₂ quotas under the EU Emissions Trading System (EU ETS) are reflected at cost in Operating expenses as incurred in line with emissions. Accruals for CO₂ quotas required to cover emissions to date are valued at market price and reflected as a current liability within Trade, other payables and provisions. Quotas owned, but exceeding the emissions incurred to date, are carried in the balance sheet at cost price, classified as Other current receivables, as long as such purchased quotas are acquired in order to cover own emissions and may be kept to cover subsequent years’ emissions.
Obligations resulting from current year emissions and the corresponding amounts for quotas that have been bought, paid, and expensed, but which have not yet been surrendered to the relevant authorities, are reflected net in the balance sheet.
All numbers in the table are presented gross (100%) for Equinor operated licenses and include both EU ETS and UK ETS quotas.
Total expensed CO₂ cost related to emissions and purchase of CO₂ quotas in Equinor related to activities resulting in GHG emissions (Equinor’s share of the operating licences in addition to land-based facilities) amounted to USD 486 million in 2023, USD 510 million in 2022 and USD 428 million in 2021. A large portion of the cost of CO₂ is related to the purchase of EU ETS quotas. The table below shows, on a 100% operated basis, an analysis of number of quotas utilised and the related monetary amounts recognised in financial statements by Equinor’s operated licences and land-based facilities subject to the requirements under EU ETS. Allocated free quotas consist of actual free quotas received in ETS during the year. The closing balance for the number of quotas consists mainly of purchased quotas for current year and remaining quotas after the settlement of current and previous year(s), including free quotas. The closing balance in USD consists mainly of the value of the remaining quotas after the preliminary allocation of the current year quotas.
Investments in renewables and low carbon solutions
Equinor’s ambition is to build a focused, carbon efficient oil and gas portfolio complemented with renewable and low-carbon solutions to create long-term value while supplying reliable energy with progressively lower emissions. 2023 saw a significant increase in the power generated from Equinor’s renewable portfolio as well as substantial additions to the portfolio pipelines in renewables. However, due to inflation and supply chain constraints, Equinor recognised an impairment in the Renewables segment on the US North East Coast offshore wind projects, see note 14 Impairments for more details.
Equinor’s investments in renewables are included as Additions to PP&E, intangibles and equity accounted investments in the REN-segment in note 5 Segments. See table below for details. Over the course of 2023, the acquisition of BeGreen, a commercial-scale offshore wind lease in California, Rio Energy in Brazil and investments related to projects in the US and the UK contributed to the significant increase in the book value compared to the prior year. See note 6 Acquisitions and disposals for more details.
Equinor is making significant steps to industrialise CCS and is already involved in the Northern Lights project in Norway providing CO₂ transport and storage solutions (in partnership with Shell and TotalEnergies). Equinor is also pursuing CCS projects in other regions that have the necessary frame conditions for low carbon solutions. The acquisition of a 25% stake in Bayou Bend, positions Equinor to be one of the largest US carbon capture and storage projects located along the Gulf Coast in Southeast Texas. Acquisition investments and capital contributions in these projects amounted to USD 179 million in 2023 (USD 36 million in 2022).
Investments in electrification of oil and gas assets
During 2023, Equinor invested around USD 200 million in electrification (around USD 250 million in 2022). Equinor’s abatement projects primarily include full and partly electrification of offshore assets in Norway at key fields and plants, including the Troll, Oseberg, Sleipner, Njord and the Hammerfest LNG plant, mainly by power from shore. Emissions abatement milestones in 2023 included the start-up of the Hywind Tampen offshore wind supplying carbon-free power to the Gullfaks A field and the electrification of the Gina Krog field with power from shore.
Research and development activities (R&D)
Equinor is involved in several R&D projects aimed at optimizing oil and gas activities, reducing emissions, and developing new business opportunities in renewables and low carbon solutions. Equinor’s total R&D activities are presented in note 9 Auditor’s remuneration and Research and development expenditures (expensed R&D) and in note 12 Property, Plant & Equipment (capitalised R&D).
Effects on estimation uncertainty
The effects of the initiatives to limit climate changes and the potential impact of the energy transition are relevant to some of Equinor’s economic assumptions and future cash flow estimations. The resulting effects and Equinor’s exposure to them are sources of uncertainty. Estimating global energy demand and commodity prices towards 2050 is challenging due to various complex factors, including technology change, taxation and production limits, which may change over time. This could lead to significant changes in accounting estimates, such as useful life (depreciation period and timing of asset retirement obligations), value-in-use (impairment assessments), and deferred tax assets (see note 11 Income taxes for expected utilisation period of tax losses carried forward and recognised as deferred tax assets).
Commodity prices
Equinor’s commodity price assumptions applied in value-in-use impairment testing are based on management’s best estimate of future market trends. This price-set is currently not equal to the price-set in accordance with achieving net zero emissions by 2050 as outlined in the WEO Net Zero Emissions by 2050 scenario. Changes in how the world acts with regards to achieving the goals in the Paris agreement could have a negative impact on the valuation of Equinor’s assets. Calculated possible impairments of upstream production assets and certain intangible assets using assumed prices for two scenarios estimated by the International Energy Agency (IEA) are provided in the sensitivity table below. These illustrative impairment sensitivity calculations are based on a simplified model with limitations as described in note 14 Impairments. A linear bridging was applied between current prices and the first price point in the price sets disclosed in both scenarios. USD 2 per bbl of transportation cost was added to the Brent-prices in the scenarios for comparability with management’s current best estimate. The IEA scenarios primarily stress oil and gas prices, not reflecting the potential impact on Equinor’s renewable and low carbon projects or trading and refinery margins. Furthermore, the MMP and REN segments represent only around 12% of Equinor’s total book value of non-current segment assets and equity accounted investments, as disclosed in note 5 Segments.
Cost of CO2
The EU ETS price has increased significantly from 25 EUR/tonne in 2020 to an average cost of EU ETS allowances of 86 EUR/tonne in 2023 (81 EUR/tonne in 2022). In its commodity price assumptions Equinor projects the price to remain high, in the region of 80 EUR/tonne for the next couple of years in real 2023 terms. In 2040 the price expected to increase to around 130 EUR/tonne (109 EUR/tonne projected in 2022), thereafter increasing to around 150 EUR/tonne in 2050 (135 EUR/tonne project in 2022) in real 2023 terms. As such, Equinor expects greenhouse gas emission costs to increase from current levels and to have a wider geographical range than today, and a global tax on CO₂ emissions will have a negative impact on the valuation of Equinor’s oil and gas assets.
Currently, Equinor pays CO₂ fees in Norway, the UK, Germany, Canada and Nigeria. Norway’s Climate Action Plan for the period 2021-2030 (Meld. St 13 (2020-2021)) which assumes a gradually increased CO₂ tax (the total of EU ETS + Norwegian CO₂ tax) in Norway to 2,000 NOK/ tonne (real 2020) in 2030 is used for impairment calculations of Norwegian upstream assets.
Equinor’s responses to this risk include evaluation of carbon intensity on both project and portfolio level in investment and divestment decisions. Equinor currently uses an internal cost of carbon, set at 82 USD/tonne in 2025 and increasing to 115 USD/ tonne by 2030 and staying flat thereafter (in countries with higher carbon costs, country specific cost expectations are used). This cost-scenario is uncertain but serves as a placeholder for possible future CO₂ pricing systems, making sure the assets are financially robust.
Climate-related considerations are included directly in the impairment calculations by estimating the CO₂ taxes in the cash flows, and indirectly through estimated commodity prices related to supply and demand. The CO₂ prices also have effect on the estimated production profiles and economic cut-off of the projects. To reflect that carbon will have a cost for all Equinor’s assets, the current best estimate of CO₂ prices is considered to be EU ETS for countries outside EU where carbon is not already subject to taxation or where Equinor has not established specific estimates.
Sensitivity table
The table below presents some relevant prices and variables compared to management’s best estimate, and an illustrative potential impairment effect given these scenarios. The scenario price-sets were retrieved from IEA’s report, World Energy Outlook 2023. Prices were adjusted for inflation and presented in Real 2023. See section Profitable portfolio in Chapter 2.2. in the Integrated annual report for more details about the scenarios:
Compared to last year’s results, the illustrative potential impairments associated with the APS scenario have increased from less than USD 0.5 billion to around USD 3 billion. Similarly, the NZE scenario has increased to around USD 10 billion, compared to around USD 4 billion last year. This is significantly impacted by the linear bridging between the current commodity prices and the first price point for the WEO scenarios, consistent with previous year’s methodology, but with lower current prices this year.
1) Management’s future commodity price assumptions applied when estimating value in use, see note 14 Impairments.
2) Scenarios: Price of CO₂ quotas in advanced economies with net zero pledges, not including any other CO₂ taxes.
3) EU ETS price assumptions have been translated from EUR to USD using Equinor’s assumptions for currency rates, EUR/USD = 1,176.
4) A scenario where all national energy and climate targets made by governments are met on time and in full. Using this scenario, the world is expected to reach a 1.7oC increase in the year 2100.
5) A scenario where the world moves on a potential path towards limiting global warming to 1.5 °C relative to pre-industrial levels.
An increase in systematic climate risk may result in a higher discount rate applied for impairment testing purposes. Please see note 14 Impairments for further information on discount rate sensitivity.
Robustness of Equinor’s portfolio, and risk of stranded assets
The transition to renewable energy, technological development, and the expected reduction in global demand for carbon-based energy, may impact the future profitability of certain upstream oil and gas assets. Equinor uses scenario analysis to outline different possible energy futures, some of which imply lower oil and natural gas prices and higher CO₂ tax. If this materialises, it can lead to a decrease in the cash flow from oil and gas, and potentially reduce the economic lifetime of some assets. Equinor seeks to mitigate this risk by improving the resilience of the existing upstream portfolio, maximising the efficiency of the infrastructure on the NCS and optimising the high-quality international portfolio. The project portfolio is robust to low oil and gas prices and actions are in place to maintain cost discipline across the company. Equinor will continue to add high value barrels to the portfolio through exploration and increased recovery, with the expectation to maintain strong oil and gas cash flow from operations until 2035. Equinor aims to maintain significant capex flexibility in the current portfolio, with only sanctioned projects being committed representing less than 50% of the yearly organic capex from 2025. This is expected to allow Equinor to optimise and reprioritise non-sanctioned projects to ensure continued generation of high value through cycles. Equinor will continuously assess the current and future exposure of its portfolio and take preventative measures to manage physical climate risks.
Based on the current production profiles, approximately 65% of Equinor’s proved oil and gas reserves, as defined by the SEC, are expected to be produced in the period 2024-2030 and more than 99% in the period 2024-2050. This indicates a lower risk of early cessation of production and can provide flexibility in adapting to the changing market conditions or a shift in global energy demand.
Equinor aims to continue to selectively explore for new resources with a focus on mature areas with existing infrastructure to minimise emissions and maximise value. During the transition, Equinor anticipates allocating a reducing share of its gross capex to oil and gas in the coming years and the volume of production is likely to decrease over time. Reaching Equinor’s net 50% reduction ambition for operated scope 1 and 2 emissions will require a company-wide, coordinated effort to execute and mature the abatement projects, improve energy efficiency, develop new technologies, and strengthen the resilience of the portfolio. Equinor aims to achieve a 20% reduction in net carbon intensity by 2030 and a 40% reduction by 2035, including scope 3 emissions. The combination of increased renewables and decarbonised energy, the scale up of low carbon solutions such as CCS and optimisation of the oil and gas portfolio provides confidence that Equinor can meet its medium-term ambitions. As such, Equinor’s ambition to become a net-zero company by 2050 have currently not resulted in the identification of additional assets being triggered for impairment or earlier cessation.
Any future exploration may be restricted by regulations, market, and strategic considerations. Provided that the economic assumptions would deteriorate to such an extent that undeveloped assets controlled by Equinor should not materialise, assets at risk are mainly comprised of the intangible assets Oil and Gas prospects, signature bonuses and the capitalised exploration costs, with a total carrying value of USD 3,205 million in 2023 (USD 3,634 million in 2022). See note 13 Intangible assets for more information regarding Equinor’s intangible assets.
Timing of Asset Retirement Obligations (ARO)
As mentioned above, there are currently no assets triggered for earlier cessation as a result of Equinor’s ambition to become a net-zero company by 2050. However, if the business cases of Equinor’s producing oil and gas assets should change materially, this could affect the timing of cessation of the assets. A shorter production period will increase the carrying value of the liability. To illustrate, performing removal five years earlier than currently scheduled would increase the liability by around USD 1.2 billion before tax (around USD 1 billion in 2022). See note 23 Provisions and other liabilities for more information regarding Equinor’s ARO, including expected timing of cash outflows of recognised asset retirement obligations. The most significant cash outflows are expected within the year 2043.
Note 14. Impairments
Accounting policies
Impairment of property, plant and equipment, right-of-use assets, intangible assets including goodwill and equity accounted investments
Equinor assesses individual assets or groups of assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Assets are grouped into cash generating units (CGUs). Normally, separate CGUs are individual oil and gas fields or plants, or equity accounted investments. Each unconventional asset play is considered a single CGU when no cash inflows from parts of the play can be reliably identified as being largely independent of the cash inflows from other parts of the play. In impairment evaluations, the carrying amounts of CGUs are determined on a basis consistent with that of the recoverable amount.
Unproved oil and gas properties are assessed for impairment when facts and circumstances suggest that the carrying amount of the asset or CGU to which the unproved properties belong may exceed its recoverable amount, and at least once a year. Exploratory wells that have found reserves, but where classification of those reserves as proved depends on whether major capital expenditure can be justified or where the economic viability of that major capital expenditure depends on the successful completion of further exploration work, will remain capitalised during the evaluation phase for the exploratory finds. If, following evaluation, an exploratory well has not found proved reserves, the previously capitalised costs are tested for impairment. After the initial evaluation phase for a well, it will be considered a trigger for impairment testing of a well if no development decision is planned for the near future and there is no firm plan for future drilling in the licence.
Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined by assessing the recoverable amount of the CGU, or group of units, to which the goodwill relates. When impairment testing goodwill originally recognised as an offsetting item to the computed deferred tax provision in a post-tax transaction on the NCS, the remaining amount of the deferred tax provision will factor into the impairment valuation.
Impairment and reversals of impairment are presented in the Consolidated statement of income as Exploration expenses or Depreciation, amortisation and net impairment, on the basis of the nature of the impaired assets as either exploration assets (intangible exploration assets) or development and producing assets (property, plant and equipment and other intangible assets), respectively.
Measurement
The recoverable amount applied in Equinor’s impairment assessments is normally estimated value in use. Equinor may also apply the assets’ fair value less cost of disposal as the recoverable amount when such a value is available, reasonably reliable, and based on a recent and comparable transactions.
Value in use is determined using a discounted cash flow model. The estimated future cash flows are based on reasonable and supportable assumptions and represent management’s best estimates of the range of economic conditions that will exist over the remaining useful life of the assets, as set down in Equinor’s most recently approved forecasts. Assumptions and economic conditions in establishing the forecasts are reviewed by management on a regular basis and updated at least annually. For assets and CGUs with an expected useful life or timeline for production of expected oil and natural gas reserves extending beyond five years, including planned onshore production from shale assets with a long development and production horizon, the forecasts reflect expected production volumes, and the related cash flows include project or asset specific estimates reflecting the relevant period. Such estimates are established based on Equinor’s principles and assumptions and are consistently applied.
The estimated future cash flows are adjusted for risks specific to the asset or CGU and discounted using a real post-tax discount rate which is based on Equinor’s post-tax weighted average cost of capital (WACC). Country risk specific to a project is included as a monetary adjustment to the projects’ cash flow. Equinor considers country risk primarily as an unsystematic risk. The cash flow is adjusted for risk that influences the expected cash flow of a project and which is not part of the project itself. The use of post-tax discount rates in determining value in use does not result in a materially different determination of the need for, or the amount of, impairment that would be required if pre-tax discount rates had been used.
Impairment reversals
A previously recognised impairment is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment was recognised. Previously recognised impairments of goodwill are not reversed in future periods.
Estimation uncertainty regarding impairment
Evaluating whether an asset is impaired or if an impairment should be reversed requires a high degree of judgement and may to a large extent depend upon the selection of key assumptions about the future. In Equinor’s line of business, judgement is involved in determining what constitutes a CGU. Development in production, infrastructure solutions, markets, product pricing, management actions and other factors may over time lead to changes in CGUs such as splitting one original CGU into several CGUs.
The key assumptions used will bear the risk of change based on the inherent volatile nature of macroeconomic factors such as future commodity prices and discount rates, and uncertainty in asset specific factors such as reserve estimates and operational decisions impacting the production profile or activity levels. Changes in foreign currency exchange rates will also affect value in use, especially for assets on the NCS, where the functional currency is NOK. When estimating the recoverable amount, the expected cash flow approach is applied to reflect uncertainties in timing and amounts inherent in the assumptions used in the estimated future cash flows. For example, climate-related matters (see also Note 3 Climate change and energy transition) are expected to have a pervasive effect on the energy industry, affecting not only supply, demand and commodity prices, but also technology changes, increased emission-related levies, and other matters with mainly mid-term and long-term effects. These effects have been factored into the price assumptions used for estimating future cash flows using probability-weighted scenario analyses.
The estimated future cash flows, reflecting Equinor’s, market participants’ and other external sources’ assumptions about the future and discounted to their present value, involve complexity. In order to establish relevant future cash flows, impairment testing requires long-term assumptions to be made concerning a number of economic factors such as future market prices, refinery margins, foreign currency exchange rates and future output, discount rates, impact of the timing of tax incentive regulations, and political and country risk among others. Long-term assumptions for major economic factors are made at a group level, and there is a high degree of reasoned judgement involved in establishing these assumptions, in determining other relevant factors such as forward price curves, in estimating production outputs, and in determining the ultimate terminal value of an asset.
1) The intangible assets line includes Goodwill, amortizable intangible assets, and certain acquisition costs related to oil and gas prospects.
For impairment purposes, the asset’s carrying amount is compared to its recoverable amount. The table below describes, per area, the Producing and development assets being impaired/(reversed), net impairment/ (reversal), and the carrying amount after impairment.
Exploration & Production Norway
In 2023, the net impairment mainly relates to reduced expected reserves on a producing asset on the Norwegian Continental Shelf. 2022, the net impairment reversal was mainly caused by increased price estimates and changed gas export strategy. In 2021, the net impairment reversal was mainly due to increased price estimates and an upward reserve revision.
Exploration & Production USA – onshore
In 2023, there were no impairments related to exploration and production assets USA – onshore. In 2022, the impairment reversal was caused by increased gas price assumptions, while in 2021 the net impairment was caused by revision of reserves and sale of an asset.
Exploration & Production USA – offshore Gulf of Mexico
In 2023, impairment reversals mainly relate to increased expected reserves on a producing asset. In 2022, the impairment reversal was caused by increased price assumptions and higher reserves estimates, while in 2021, the impairment was due to a negative reserve revision.
Exploration & Production International – Europe and Asia
In 2023, the impairment relates to the held for sale reclassification of Azerbaijan assets at the end of the year (see note 6 Acquisitions and disposals). In 2022, the net impairment was mainly caused by the decision to exit Russia. This was to a large extent offset by a reversal on Mariner in the UK mainly due to optimisation of the production profile and higher prices, supported by a slight increase in reserves estimates. In 2021, the net impairment was mainly caused by downward reserve revisions partially offset by higher prices.
Marketing, Midstream & Processing
In 2023, net impairment mainly relates to expectations of stabilizing refinery margins at a lower level than the margins consumed in recent periods. In 2022 the net impairment reversal was mainly related to increased refinery margin assumptions, while in 2021, the impairment losses were caused by increased CO₂ fees and – quotas on a refinery and a classification to held for sale.
Renewables USA – Offshore
In 2023, Equinor’s offshore wind projects on the US North East Coast are facing increased costs due to inflation and supply chain constraints. On 12 October 2023, the New York State Public Service Commission (PSC) rejected price increase petitions related to offtake agreements from several offshore and onshore wind farm developers, including Equinor’s joint ventures. As a consequence, an impairment of USD 300 million has been recognised. The recoverable amount of Equinor’s investments in the offshore wind projects on the US North East Coast has been established applying a fair value approach. These investments are accounted for using the equity method.
Accounting assumptions
There are inherent uncertainties in the assumptions, however the commodity price assumptions as well as currency assumptions reflect management’s best estimate of the price and currency development over the life of the Group’s assets based on its view of relevant current circumstances and the likely future development of such circumstances, including energy demand development, energy and climate change policies as well as the speed of the energy transition, population and economic growth, geopolitical risks, technology and cost development and other factors. Management’s best estimate also takes into consideration a range of external forecasts.
Equinor has performed a thorough and broad analysis of the expected development in drivers for the different commodity markets and exchange rates. Significant uncertainty exists regarding future commodity price development due to the transition to a lower carbon economy, future supply actions by OPEC+ and other factors. Such analysis resulted in changes in the long-term price assumptions with effect from the second quarter of 2023. The main price assumptions applied in impairment and impairment reversal assessments are disclosed in the table below as price-points on price curves. Previous price-points applied from the third quarter of 2022 and up to and including the first quarter of 2023 are provided in brackets.
Climate considerations are included in the impairment calculations directly by estimating the CO₂ taxes in the cash flows. Indirectly, the expected effect of climate change is also included in the estimated commodity prices where supply and demand are considered. The prices also have effect on the estimated production profiles and economic cut-off of the projects. Furthermore, climate considerations are a part of the investment decisions following Equinor’s strategy and commitments to the energy transition.
Norway’s Climate Action Plan for the period 2021-2030 (Meld. St 13 (2020-2021)) which assumes a gradually increased CO₂ tax (the total of EU ETS + Norwegian CO₂ tax) in Norway to 2,000 NOK/tonne in 2030 is used for impairment calculations of Norwegian upstream assets.
To reflect that carbon will have a cost for all our assets the current best estimate is considered to be EU ETS for countries outside EU where carbon is not already subject to taxation or where Equinor has not established specific estimates.
The long-term NOK currency exchange rates are expected to be unchanged compared to previous long-term assumptions. The NOK/USD rate from 2026 and onwards is kept at 8.50, the NOK/EUR at 10.00. The USD/GBP rate is kept at 1.35.
The base discount rate applied in value in use calculations is 5.0% real after tax. The discount rate is derived from Equinor’s weighted average cost of capital. For projects, mainly within the REN segment in periods with fixed low risk income, a lower discount rate will be considered. A derived pre-tax discount rate is in the range of 24% for E&P Norway, 6% for E&P USA and 7% for MMP depending on the asset’s characteristics, such as specific tax treatments, cash flow profiles, and economic life. The pre-tax rates for 2022 were 42-102%, 6-9% and 7% respectively, in addition to 8-9% for E&P International.
Sensitivities
Significant downward adjustments in Equinor’s commodity price assumptions would result in impairment losses on certain producing and development assets, including intangible assets subject to impairment assessment, while an opposite adjustment could lead to impairment-reversals.
Assuming a reasonably possible 30% decline in commodity price forecasts over the assets’ lifetime could result in an illustrative impairment recognition of approximately USD 10 billion before tax effects. See note 3 Climate change and energy transition for possible effect of using the prices in a 1.5oC compatible Net Zero Emission by 2050 scenario and the Announced Pledges.
Similarly, for illustrative purposes, Equinor assessed the sensitivity of the discount rate used in the value in use calculations for upstream producing assets and certain related intangible assets. It was determined an increase in the discount rate from 5.0% to 6% real after tax, in isolation, the impairment amount recognised could have a potential impact of USD 2 billion before tax effects.
The illustrative impairment sensitivities above are based on a simplified method, which assumes no changes to other input factors. However, Equinor notes a price reduction of 30% or those representing Net Zero Emission scenario and Announced Pledges Scenario would likely impact business plans and other factors used in estimating an asset’s recoverable amount. The correlated changes reduce the stand-alone impact of the price sensitivities. Changes in such input factors would likely include a reduction in the cost level in the oil and gas industry and offsetting foreign currency effects, which has historically occurred following significant changes in commodity prices.
Accounts examples 