Annual Report 2005 (6 MB) - Lundin Petroleum

NOTE 16 – DEFERRED FINANCING FEES (TSEK)
The deferred fi nancing fees relate to the costs of the bank credit facility and are being amortised over the period of the loan. Amortisation
expenses amounted to TSEK 15,182 (TSEK 7,224).
NOTE 17 – DEFERRED TAX ASSET (TSEK)
The deferred tax asset is primarily relating to loss carry forwards in Norway for an amount of TSEK 163,895 (TSEK 110,078), France for an
amount of TSEK 37,691 (TSEK 28,235) and Tunisia for an amount of TSEK 15,917 (TSEK 15,867). As at 31 December 2004, a deferred tax
asset was included for the United Kingdom amounting to TSEK 240,661. Deferred tax assets in relation to tax loss carry forwards are only
recognised in so far that there is a reasonable certainty as to the timing and the extent of their realisation.
NOTE 18 – DERIVATIVE INSTRUMENTS (TSEK)
As an international oil and gas exploration and production company operating globally, Lundin Petroleum is exposed to fi nancial risks
such as fl uctuations in currency rates, oil price, interest rates as well as credit fi nancing. The Company shall seek to control these risks
through sound management practice and the use of internationally accepted fi nancial instruments, such as oil price hedges and interest
rate hedges. Lundin Petroleum uses fi nancial instruments solely for the purpose of minimising risks in the Company’s business.
Currency risk
Lundin Petroleum’s policy on currency rate hedging is, in case of currency exposure, to consider setting the rate of exchange for known
costs in non-US dollar currencies to US dollars in advance so that future US dollar cost levels can be forecasted with a reasonable degree
of certainty. The Company will take into account the current rates of exchange and market expectations in comparison to historic trends
and volatility in making the decision to hedge.
Oil price risk
Lundin Petroleum’s policy is to adopt a fl exible approach towards oil price hedging, based on an assessment of the benefi ts of the hedge
contract in specifi c circumstances. Based on analysis of the circumstances Lundin Petroleum will assess the benefi ts of forward hedging
monthly sales contracts for the purpose of establishing cash fl ow. If it believes that the hedging contract will provide an enhanced cash
fl ow then it may choose to enter into an oil price hedge.
Interest rate risk
Lundin Petroleum will assess the benefi ts of interest rate hedging on borrowings on a continuous basis. If the hedging contract provides
a reduction in the interest rate risk at a price that is deemed acceptable to the Company, then Lundin Petroleum may choose to enter into
an interest hedge.
Credit risk
Lundin Petroleum’s policy is to limit credit risk by limiting the counter-parties to major banks and oil companies. Where it is determined
that there is a credit risk for oil and gas sales, the policy is to require an irrevocable letter of credit for the full value of the sale. The policy
on joint venture parties is to rely on the provisions of the underlying joint operating agreements to take back possession of the licence or
the joint venture partner’s share of production for non-payment of cash calls or other amounts due.
Liquidity risk
On 16 August 2004, the Group entered into a MUSD 385 loan facility to fund the DNO acquisition and to provide further funds for
corporate purposes. The MUSD 385 loan facility has been used to provide Letters of Credit in the amount of MUSD 35 as security for the
payment of future site restoration costs to former owners of the Heather fi eld, off shore UK, and to provide funds for corporate purposes.
The amount of cash drawings outstanding at 31 December 2005 amounted to MUSD 92.5. The Group has entered into oil price, interest
rate and currency hedges to remove a portion of market risk from the future cash fl ows. It is expected that the Group’s operating cash
fl ows will be suffi cient to meet the Group’s current development and exploration expenditure requirements, but if the cash fl ow should
be insuffi cient the Group can utilise the undrawn portion of the loan facility.
Fair value of outstanding derivative
31 December 2005 31 December 2004
instruments in the balance sheet:
Assets Liabilities Assets Liabilities
Interest rate swaps 15,255 4,373 – 8,408
Oil hedge contracts – 170,833 – 3,545
Foreign exchange forward contracts – 18,571 – –
Total 15,255 193,777 – 11,953
Non-current 1,825 – – 1,390
Current 13,430 193,777 – 10,563
Total 15,255 193,777 – 11,953
As at 31 December 2004, the fair value of the derivative instruments amounted to MSEK 167.7. As IAS 39 has been applied as from
1 January 2005, this fair value has not been recorded at 31 December 2004.
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