Equinor ASA – Annual report – 31 December 2024
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 applied in these estimates are derived from 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 continuously reviewed, taking into account 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 transition to a lower carbon economy 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 impacted by, for instance, maintenance programmes, among other factors. In the long-term, the results are impacted by the success of exploration, field developments, operating activities, and progress within renewables and low carbon solutions.
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 2024 (WEO) scenarios presented by the International Energy Agency (IEA), and in note 14 Impairments.
Equinor assesses risks in short-, medium- and long-term perspectives, including strategic and emerging risks that can impact achievement of our corporate objectives. Climate-related risks are assessed 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 Energy transition plan and climate related ambitions are responses to the challenges and opportunities presented by the energy transition. On the right is a summary of relevant risks and risk adjusting actions:
Impact on Equinor’s financial statements
Equinor’s double materiality assessment identified transition risks as a material sustainability matter. The quantified impact on the financial statements for 2024 is not significant.
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. The share of free quotas is expected to be significantly reduced in the future, partially due to the phasing out of free quotas for gas production by 2030.
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 current liabilities within Trade and other payables. 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, as received or settled during the calendar year.
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 465 million in 2024, USD 486 million in 2023 and USD 510 million in 2022. 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 calendar year. In 2024, Equinor received the allocated share of free quotas for the years 2024 and 2023, due to a delay in the allocation schedule. 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. Equinor continues to mature its renewables portfolio under development. During 2024 Equinor closed an asset swap transaction with bp, under which Equinor took full ownership of the Empire Wind lease and projects and bp took full ownership of the Beacon Wind lease and projects.
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 2024, the additional investments in the South Brooklyn Marine Terminal (SBMT) and Empire Wind projects in the US and investments related to projects in the UK and Europe 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 taking steady steps to industrialise CCS. During 2024, the Northern Lights project was completed and is now ready to receive CO2, and already fully booked by customers. Equinor is pursuing the Net Zero Teesside and Northern Endurance Partnership projects in order to provide thermal power and CCS to local industries in the UK. In the US, Equinor is participating in one of the largest US carbon capture and storage projects, Bayou Bend, which is located along the Gulf Coast in Southeast Texas. Investments in these projects amounted to USD 76 million in 2024 (USD 179 million in 2023).
Investments in electrification of oil and gas assets
During 2024, Equinor invested around USD 180 million in electrification (around USD 200 million in 2023). Equinor’s abatement projects primarily include full and partial electrification of offshore assets in Norway at key fields and plants, including the Troll, Oseberg, Njord and the Hammerfest LNG plant, mainly by power from shore. Emissions abatement milestones in 2024 included partial electrification of the Troll B and Troll C fields. Further, Sleipner field centre, along with the Gudrun platform and other associated fields, were connected to 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).
Power Purchase Agreements (PPAs)
Equinor holds various long-term power purchase agreements (PPAs) for power sourced from wind and solar parks with an expiry date up until 2040. The agreements imply balancing services provided to the asset owners, whereby Equinor takes over the long-term balancing risk related to production. The majority of these agreements are settled at the appropriate market price less a balancing fee and expire by the end of 2026. The agreements include pay-as-produced elements, but since the majority of the power purchase agreements are linked to the applicable market prices, and the power purchased is mainly sold on power exchanges at market price, Equinor only holds a limited long-term price risk related to these agreements. For accounting policies related to power sales and related purchases, please refer to note 7 Total revenues and other income.
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
Significant changes in oil and gas prices outside planning assumptions could impact our financial performance. 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 mapped out to achieve net zero emissions by 2050 and limit global warming to 1.5 °C as outlined in IEA’s WEO Net Zero Emissions 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. A calculation of possible impairments of Equinor’s upstream production assets and certain intangible assets using price assumptions from two IEA WEO scenarios are provided in the sensitivity table below. In these estimates we use management’s price assumptions until 2030, and from 2030 onwards we apply linear interpolation between IEA’s prices. In previous years, a linear bridging was applied between the current commodity prices and the first price point provided in the WEO scenarios. To be comparable to Equinor management’s price assumptions, we adjust the crude oil prices in the WEO scenarios for transportation cost and all prices for real inflation in 2024. These illustrative impairment sensitivity calculations are based on a simplified model with limitations as described in note 14 Impairments.
Cost of CO2
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.
We apply carbon price assumptions for all Equinor’s assets, also for assets in countries outside EU where CO2 is not already subject to taxation or where Equinor has not established specific estimates. Our default assumption, in real 2024 terms, is a price of USD 92 per tonne starting in 2026 that increases to USD 118 per tonne by 2030 and stays flat thereafter.
The EU ETS price has increased significantly from 25 EUR/tonne in 2020 to an average cost of EU ETS allowances of 66 EUR/tonne in 2024 (86 EUR/tonne in 2023). Equinor’s commodity price assumptions include an EU ETS price of near 70 EUR/tonne for the next two years. By 2040 the price is assumed to increase to around 136 EUR/tonne (130 EUR/tonne projected in 2024), and thereafter to around 165 EUR/tonne in 2050 (150 EUR/tonne projected in 2024) in real 2024 terms.
Thus, Equinor expects greenhouse gas emission costs to increase from current levels and to have a wider geographical range than today. During 2024, Equinor paid CO₂-related fees in Norway, the UK and Germany for its own operated assets and Nigeria and Canada for partner-operated assets.
The CO₂-tax assumptions used for impairment calculations of Norwegian upstream assets are based on Norway’s Climate Action Plan for the period 2021-2030 (Meld. St 13 (2020-2021)), assuming a gradually increased CO₂ tax (the total of EU ETS + Norwegian CO₂ tax) in Norway to 2,000 NOK/tonne (real 2020) in 2030.
Sensitivity table
The table below presents some relevant prices and variables from two scenarios in IEA’s WEO 2024 compared to management’s price assumptions, and an estimated potential impairment effect given these scenarios. The IEA prices are adjusted for inflation and presented in 2024 real terms. Refer to section 3.2 E1 Climate change in the Annual Report 2024 for more details about the scenarios.
An increase in systematic climate risk may result in a higher discount rate applied for impairment testing purposes. Please refer to note 14 Impairments for further information on discount rate sensitivity.
The IEA scenarios primarily stress oil and gas prices, not reflecting the potential impact on trading and refinery margins in MMP, or Equinor’s renewable assets and low carbon projects. For most MMP assets, margin movements are not directly correlated to oil and gas price fluctuations. Further, many of Equinor’s renewable assets have fixed price offtake contracts, and therefore are not directly sensitive to power prices. MMP and REN segments represent only around 14% of Equinor’s total book value of non-current segment assets and equity accounted investments, as disclosed in note 5 Segments. Including these assets in the calculation of illustrative potential impairments would therefore not be expected to have a material impact
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 = 1.15
4)A scenario where the world moves on a potential path towards limiting global warming to 1.5 °C relative to pre-industrial levels.
5)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.
Robustness of Equinor’s portfolio, and risk
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 continues to pursue high-value barrels to enhance the portfolio, through exploration, increased recovery in addition to acquisitions and divestments, with the expectation of strong oil and gas cash flow from operations. We further aim to maintain significant capex flexibility in the current portfolio, with non-sanctioned projects representing a substantial part of the expected capex for the period 2026-2027 and beyond. This is expected to allow Equinor to optimise and re-prioritise non-sanctioned projects to ensure continued generation of high value through cycles.
Based on the current production profiles, approximately 57% of Equinor’s proved oil and gas reserves, as defined by the SEC, are planned to be produced in the period 2025-2030 and more than 98% in the period 2025-2050. In addition, approximately 49% of Equinor’s expected oil and gas reserves are planned to be produced in the period 2025-2030 and around 97% in the period 2025-2050. In both cases, 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. Please refer to note 12 Property, plant and equipment for the definition of proved and expected oil and gas reserves.
Equinor will 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 will continue to supply oil and gas beyond 2035 but we anticipate that it will form an increasingly smaller proportion of our portfolio over time due to both declining demand and the expected production decline on the Norwegian Continental Shelf. 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 15-20% reduction in net carbon intensity by 2030 and a 30-40% 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 ambitions in the Energy transition plan have currently not resulted in the identification of additional assets being triggered for impairment or earlier cessation.
Any future exploration may be restricted by policies, 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 3.6 billion in 2024, 1.1 being in EPN and 2.5 being in EPI. (USD 3.2 billion in 2023, USD 1.0 million in E&P Norway and 2.2 in E&P International). See note 13 Intangible assets for more information regarding Equinor’s intangible assets.
Equinor has not currently identified material physical risk related to potential exposure of its asset portfolio in modelled climate change scenarios, and will continue to develop its approach for detailed assessment going forward.
Timing of Asset Retirement Obligations (ARO)
As mentioned above, there are currently no assets triggered for earlier cessation as a result of Equinor’s ambitions in the Energy transition plan 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 1.1 billion before tax and excluding held for sale assets (around USD 1.2 billion in 2023), which is mainly related to E&P Norway. 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 between 2035-2039.
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 when events or changes in circumstances indicate that the carrying value may not be recoverable. Assets are grouped into cash generating units (CGUs), typically individual oil and gas fields, 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 readily identified as being largely independent of the cash inflows from other parts of the play. In impairment assessments, the carrying amounts of CGUs are determined on a basis consistent with that of the recoverable amount.
Properties that are not yet classified as reserves 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 hydrocarbon resources, but where classification of those resources as reserves 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 hydrocarbon resources, 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 might be impaired. Impairment is determined by assessing the recoverable amount of the CGU, or group of units, to which the goodwill relates. When conducting impairment testing of goodwill initially 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 either Exploration expenses or Depreciation, amortisation and net impairment losses. This classification depends on the nature of the impaired assets, whether they are as 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 Equinor’s most recently approved forecasts by management, which 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. 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 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’ cashflow. 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. 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 largely depend on the selection of key assumptions about future conditions. In Equinor’s business context, judgement is necessary 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 multiple CGUs.
The key assumptions used are subject to change due to the inherently volatile nature of macro- economic factors such as future commodity prices and discount rates, as well as uncertainty in asset specific factors like reserve estimates and operational decisions impacting the production profile or activity levels. Fluctuations 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 impact 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 through probability-weighted scenario analyses.
Estimating future cash flows involves complexity, as it requires considering assumptions from Equinor’s, market participants’ and other external sources’ assumptions about the future and discounting them to present value. 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, future output, discount rates, impact of the timing of tax incentive regulations, and political and country risk among others. These long-term assumptions for major economic factors are made at a group level, and involve a high degree of reasoned judgement. This judgement is also required, in determining other relevant factors such as forward price curves, in estimating production outputs, and in determining the ultimate terminal value of an asset.
The intangible assets line includes Goodwill, amortisable 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 related to reduced expected reserves on a producing asset on the Norwegian Continental Shelf. In 2022, the net impairment reversal was mainly caused by increased price estimates and changed gas export strategy.
Exploration & Production USA – onshore
The impairment reversal in 2022 was caused by increased gas price assumptions.
Exploration & Production USA – offshore
In 2023, impairment reversals mainly related to increased expected reserves on a producing asset, while in 2022, the impairment reversal was caused by increased price assumptions and higher reserves estimates.
Exploration & Production International – Europe and Asia
In 2023, the impairment related to the held for sale reclassification of Azerbaijan assets. 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.
Marketing, Midstream & Processing
In 2023, the net impairment mainly related to expectations of stabilizing refinery margins at a lower level than the margins consumed in recent periods, while in 2022 the net impairment reversal was mainly related to increased refinery margin assumptions.
Renewables USA – Offshore
In 2023, Equinor’s offshore wind projects on the US North East Coast were facing increased costs due to inflation and supply chain constraints. In 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 was recognised. The recoverable amount was established applying a fair value approach. These investments are accounted for using the equity method.
Accounting assumptions
Management’s future commodity price assumptions and currency assumptions are used for value in use impairment testing. While there are inherent uncertainties in the assumptions, 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 among 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 2024. 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 2023 and up to and including the first quarter of 2024 are provided in brackets.
1) Basis year 2024. The prices in the table are price-points on price-curves.
Further, with effect from the second quarter of 2024, Equinor revised the long-term exchange rates. The USD/NOK rate was revised to 10.0 (previously 8.5), the EUR/NOK rate was revised to 11.5 (previously 10.0) and the USD/GBP rate was revised to 1.30 (previously 1.35). This conclusion was supported by the historical 5-year average and forward spot prices in the currency market.
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 an 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.
The CO₂-tax assumptions used for impairment calculations of Norwegian upstream assets are based on Norway’s Climate Action Plan for the period 2021-2030 (Meld. St 13 (2020-2021)), assuming a gradually increased CO₂ tax (the total of EU ETS + Norwegian CO₂ tax) in Norway to 2,000 NOK/tonne (real 2020) in 2030.We apply carbon price assumptions for all Equinor’s assets, also for assets in countries outside EU where CO2 is not already subject to taxation or where Equinor has not established specific estimates.
The base discount rate applied in value in use calculations has been revised from 5.0% applied in 2023 to 5.5% real after tax following our regular annual review of discount rates. 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 pre-tax discount rate is derived based on the asset’s characteristics, such as specific tax treatments, cash flow profiles, and economic life. The pre-tax rates for 2023 were 24% for E&P Norway, 6% for E&P USA and 7% for MMP.
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 6 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 scenario as estimated by the International Energy Agency (IEA).
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. An increase in the discount rate from 5.5% to 6.5% real after tax, in isolation, would have no material impact on the recognised impairment amount 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 that 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 