Risks relating to the oil and gas industry
Our business, results of operations, cash flow and financial condition depend significantly on the level of oil and gas prices and market expectations to these, and may be adversely affected by volatile oil and gas prices and by the general global economic and financial market situation.em>
Our profitability is determined in large part by the difference between the income received from the oil and gas that we produce and our operational costs, taxation costs relating to recovery (which are assessable irrespective of sales), as well as costs incurred in transporting and selling the oil and gas. Lower prices for oil and gas may thus reduce the amount of oil and gas that we are able to produce economically. This may also reduce the economic viability of the production levels of specific wells or of projects planned or in development to the extent that production costs exceed anticipated revenue from such production.
The economics of producing from some wells and assets may also result in a reduction in the volumes of our reserves. We might also elect not to produce from certain wells at lower prices. All of these factors could result in a material decrease in our net production revenue, causing a reduction in our oil and gas acquisition and development activities. In addition, certain development projects could become unprofitable because of a decline in price and could result in the company having to postpone or cancel a planned project, or if it is not possible to cancel the project, carry out the project with negative economic impact.
In addition, a substantial material decline in prices from historical average prices could reduce our ability to refinance our outstanding credit facilities and could result in a reduced borrowing base under credit facilities available to the company, including the RBL facility. Changes in the oil and gas prices may thus adversely affect our business, results of operations, cash flow, financial condition and prospects.
<em>Exploration, development and production operations involve numerous safety and environmental risks and hazards that may result in material losses or additional expendituresem>
Developing oil and gas resources and reserves into commercial production involves risk. Our exploration operations are subject to all the risks common in our industry. These risks include, but are not limited to, encountering unusual or unexpected rock formations or geological pressures, geological uncertainties, seismic shifts, blowouts, oil spills, uncontrollable flows of oil, natural gas or well fluids, explosions, fires, improper installation or operation of equipment and equipment damage or failure. Given the nature of our offshore operations, our exploration, operating and drilling facilities are also subject to the hazards inherent in marine operations, such as capsizing, sinking, grounding and damage from severe storms or other severe weather conditions, as well as loss of containment, fires or explosions.
The market in which we operate is highly competitive
The oil and gas industry is very competitive. Competition is particularly intense in the acquisition of (prospective) oil and gas licences. Our competitive position depends on our geological, geophysical and engineering expertise, financial resources, the ability to develop our assets and the ability to select, acquire, and develop proven reserves.
Risks relating to the business of the company
Our current production and expected future production is concentrated in a few fields
Our production of oil and gas is concentrated in a limited number of offshore fields. If mechanical or technical problems, storms or other events or problems affect the production on one of these offshore fields, it may have direct and significant impact on a substantial portion of our production. Also, if the actual reserves associated with any one of our fields are less than the estimated reserves, our results from operations and financial condition could be materially adversely affected.
Currently, a significant proportion of our production comes from the Greater Alvheim Area as production from Alvheim fields amounted to 62.3 mboepd, or 53 per cent of our total production for the year ended 31 December 2016. The company is especially sensitive to any shutdown or other technical issues on the Alvheim FPSO because all of the Alvheim Area fields are produced via the Alvheim FPSO.
There are risks related to redetermination of unitized petroleum deposits
Unitization agreements relating to our production licences may include a redetermination clause, stating that the apportionment of the deposit between licences can be adjusted within certain agreed time periods. Any such redetermination of our interest in any of our licences may have a negative effect on our interest in the unitized deposit, including our tract participation and cash flow from production. No assurance can be made that any such redetermination will be satisfactorily resolved, or will be resolved within reasonable time and without incurring significant costs. Any redetermination negatively affecting our interest in a unit may have a material adverse effect on our business, results of operations, cash flow, financial condition and prospects.
Our development projects are associated with risks relating to delays and costs
Our ongoing development projects involve advanced engineering work, extensive procurement activities and complex construction work to be carried out under various contract packages at different locations onshore. Furthermore, we (together with our licence partners), must carry out drilling operations, install, test and commission offshore installations and obtain governmental approval to take them into use prior to commencement of production. The complexity of our development projects makes them very sensitive to circumstances that may affect the planned progress or sequence of the various activities, as this may result in delays or cost increases.
Although we believe that the development projects will be completed on schedule in accordance with all licence requirements and within the estimated budgets, our current or future projected target dates for production may be delayed and cost overruns may incur.
Furthermore, our estimated exploration costs are subject to a number of assumptions that may not prove to be correct. Any such inability to explore, appraise or develop petroleum operations or incorrect assumptions regarding exploration costs may have a material adverse effect on our growth ambitions, future business and revenue, operating results, financial condition and cash flow.
We are subject to third-party risk in terms of operators and partners
Where we are not the operator of a licence, although we may have consultation rights or the right to withhold consent in relation to significant operational matters depending on the level of our interest in such licence (as most decisions by the management committee only require a majority vote), we have limited control over management of the assets and mismanagement by the operator or disagreements with the operator as to the most appropriate course of action may result in significant delays, losses or increased costs to us.
We are subject to third-party risk in terms of contractors
Market conditions may impair the liquidity situation of contractors and consequently their ability to meet its obligations towards Aker BP. This may in turn impact both project timelines and cost.
Our oil and gas production could vary significantly from reported reserves and resources
Our reserve evaluations have been prepared in accordance with existing guidelines. These evaluations include a number of assumptions relating to factors such as initial production rates, recovery rates, production decline rates, ultimate recovery of reserves, timing and amount of capital expenditures, marketability of production, future prices of oil and gas, operating costs, and royalties and other government levies that may be imposed over the producing life of the reserves and resources. Actual production and cash flows will vary from these evaluations, and such variations could be material. Hence, although we have an understanding of the life expectancy of each of our assets, the life of an asset may be shorter than anticipated. Among other things, evaluations are based, in part, on the assumed success of exploration activities intended to be undertaken in future years. The reserves, resources and estimated cash flows to be derived therefrom contained in such evaluations will be reduced to the extent that such exploration activities do not achieve the level of success assumed in the evaluations, and such reductions may have a material adverse effect on our business, results of operations, cash flow and financial condition.
<em>The company may require additional capital in the future, which may not be available on favourable terms, or at allem>
The company’s future capital requirements depend on many factors, including whether the company’s cash flow from operations is sufficient to fund the company’s business plans. The company may need additional funds in the longer term in order to further develop exploration and development programmes or to acquire assets or shares of other companies. In particular, the development projects require significant capital expenditures in the years to come. Even though the company has taken measures to ensure a solid financial basis for the development projects, the company cannot assure that it will be able to generate or obtain sufficient funds to finance the projects. In particular, given the extensive scope of the projects, any unforeseen circumstances or actions to be dealt with that is not accounted for, may result in a substantial gap between estimated and actual costs. Thus, the actual costs necessary to carry out the projects may be considerably higher than currently estimated. These investments, along with the company’s ongoing operations, may be financed partially or wholly with debt, which may increase the company’s debt levels above industry standards.
The company may also have to manage its business in a certain way so as to service its debt and other financial obligations. Should the financing of the company not be sufficient to meet its financing needs, the company may, among other things, be forced to reduce or delay capital expenditures or research and development expenditures or sell assets or businesses at unanticipated times and/or at unfavourable prices or other terms, or to seek additional equity capital or to restructure or refinance its debt. There can be no assurance that such measures would be successful or would be adequate to meet debt and other obligations as they come due, or would not result in the company being placed in a less competitive position.
The general financial market conditions, stock exchange climate, interest level, the investors’ interest in the company, the share price of the company, as well as a number of other factors beyond the company’s control, may restrict the company’s ability to raise necessary funds for future growth and/or investments. Thus, additional funding may not be available to the company or, if available, may not be available on acceptable terms. If the company is unable to raise additional funds as needed, the scope of its operations may be reduced and, as a result, the company may be unable to fulfil its long-term development programme, or meet its obligations under its contracts, which may ultimately be withdrawn or terminated for non-compliance. The company may also have to forfeit or forego various opportunities, curtail its growth and/or reduce its assets. This could have a material adverse effect on the company’s business, prospects, financial condition, results of operations and cash flows, and on the company’s ability to fund the development of its business.
The company is exposed to interest rate and liquidity risk associated with its borrowing portfolio and fluctuations in underlying interest rates
The company’s long-term debt is primarily based on floating interest rates. An increase in interest rates can therefore materially adversely affect the company’s cash flows, operating results and financial condition and make it difficult to service its financial obligations. The company has, and will in the future have, covenants related to its financial commitments. Failure to comply with financial obligations, financial covenants and other covenants may entail several material adverse consequences, including the need to refinance, restructure, or dispose of certain parts of, the company’s businesses in order to fulfil the company’s financial obligations and there can be no assurances that the company in such event will be able to fulfil its financial obligations.
Changes in foreign exchange rates may affect the company’s results of operations and financial position
The company is exposed to market fluctuations in foreign exchange rates due to the fact that the company reports profit and loss and the balance sheet in USD. Revenues are in USD for oil and in GBP and EUR for gas, while operational costs and investments are in several other currencies in addition to USD. Moreover, taxes are calculated and paid in NOK. The company actively manages its foreign currency exposure through a mix of forward contracts and options, however significant fluctuations in exchange rates between USD and NOK could adversely affect the liquidity position of the company. The company expects to maintain its foreign exchange hedging activity in 2017.
The company is exposed to risk of counterparties being unable to fulfil their financial obligations
The company’s partners and counterparties consist of a diverse group of companies with no single material source of credit risk. However, a general downturn in financial markets and economic activity may result in a higher volume of late payments and outstanding receivables, which may in turn adversely affect the company’s business, operating results, cash flows and financial condition.