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Following a series of disclosures at Dagens Næringsliv about Equinor’s billion-dollar losses in the US and critical internal audit reports on the land business there, the company engaged the audit firm PwC to conduct a review by separate from the company’s international operations. The report was released on Friday.
– For us at Equinor and for me, this report is a tough and demanding read. It describes a period in our history when there was a large investment in land in the US and which suffered significant financial losses, outgoing CEO Eldar Sætre said on Friday.
The report reveals that the company acquired the shale oil company Brigham Exploration in 2011 based on the belief that the price of oil over the next ten years will be $ 125 a barrel. It is now at $ 43.
The report points to the disorder and chaos in the US organization, internal control challenges that have yet to be clarified, and conflicts between internal audit and management in the US.
– We have had great economic losses. Investments were not strong when oil prices fell. We have had significant internal control challenges that should have been discovered earlier, Board Chairman Jon Erik Reinhardsen at Equinor said at the press conference.
Total losses are around 200 billion NOK.
Lack of follow-up and limited experience
– Now I will tell a story about something that went wrong, but it has been a lot of good practice, good practice and cleaning measures. The challenges have been complex and there are no individual incidents or people behind them, PwC’s state-authorized Eli Moe-Helgesen said when presenting the report.
He has led the group with PwC employees and Equinor employees as members. The report lists several points where the company has failed.
- Equinor’s growth strategy led to a very scant focus on creating and controlling value. Activity in the land business increased faster than major support systems could handle.
- The company’s monitoring should have been more robust and did not sufficiently reflect the risk image of this business.
- Management had limited experience in ground operations in the United States and there was a lack of continuity in key roles. This had a negative impact on the monitoring and operation of this business by the company.
- Since 2014, extensive improvement measures have been implemented, which were also reported to the board. This has contributed to a significant improvement in internal control in the United States today.
- The findings and relevant actions of the internal audit reports related to Equinor’s operations in the United States and international operations in general have been followed and closed by the company, with a few exceptions where improvement work is still ongoing. .
The committee has reviewed the period from 2007 to 2019. She says the large losses are mainly due to write-offs as a result of lower-than-expected oil and gas prices. The lack of cost control has cost $ 100 million in direct costs. The report states that it has had higher indirect costs, but that it is difficult to measure.
When DN asks if they can give an estimate, Moe-Helgesen responds:
– No, we don’t have estimates. There are some indirect costs. It’s just speculation.
Everything is not cleaned
DN’s disclosures this spring were about reports in the period between 2013 and 2016. On Thursday, DN was able to report another red internal report from 2019. The conclusion was that Equinor had not been in control at all. Red reports are reports in which significant deficiencies are identified. Said report will be considered by the management and board of directors of the Equinor group.
The 2019 report describes, among other things, a company that does not yet have control over costs. In the land business, goods and services were purchased in 2018 for around USD 1.4 billion, around NOK 13 billion. Purchases over NOK 10 billion were handled without established normal shopping routines, according to the report.
The chairman of the board, Jon Erik Reinhardsen, admitted in the press conference that they have not been able to clarify all the points that the audit reports point to.
– DN was able to report yesterday on a new critical internal report from 2019 that showed Equinor still had major issues with cost control. What has changed in a year?
– You referred to an audit report last year that concluded that things are not as they should be. What has been done since then is that we have tried to incorporate the group system. Corrective measures are subsequently taken. We are at a level where we have an acceptable risk. We have also discussed the challenges surrounding the procurement process with the Minister. We have been open with the Minister that there are still challenges around the procurement process.
– Representatives at the Storting have said that the impression that remains is that this has been cleaned up. Does this mean that there has been a communication breakdown somewhere other than between you and the Minister?
– No, that doesn’t mean. What Eldar and I have said is that internal control has improved significantly than it was. So there is something left, but it is at an acceptable level of risk, he says.
Conflicts
The PwC Group has reviewed 122 internal audit reports throughout its international operations. Of these, 44 are related to the United States: 17 of them are red or have red findings.
The report points to significant conflicts between the management of the business area and the internal audit of the company during the work of the reports. Conflicts between management and internal audit are not uncommon, the report says, but in the United States it was special.
– The relationship between internal audit and the business area fell to a level that was counterproductive, says the report.
The conflict was not primarily about underlying facts, but about who had discovered the deficiencies, how the deficiencies were presented, and how progress was recognized in the work of correcting the deficiencies.
Dagens Næringsliv has previously written that the relationship between US CEO Torgrim Reitan and internal audit was so bad at one point that the head of the group’s audit committee had to take on an intermediary role.
It all depends on the price of oil
CEO Eldar Sætre admits that it all depends on the price of oil if the company manages to make up for losses in the US, which have amounted to NOK 200 billion.
– You wonder what the market says about the price of oil and gas. We have 16 billion left in book values. We have deferred tax benefits. What we can do is improve, so that what we get from the market is multiplied.
– How is that possible when Eagle Ford is sold and activity in North Dakota is rejected?
– Weak markets are not good at getting it back. But we expect better market prospects in the future. We have a better portfolio to work on in the future.
– Do you regret having started doing business in the United States?
– Taking into account what we know today, it is clear that we would like to dispense with investments. We pay too high a price to participate in some projects, says Sætre. (Terms)Copyright Dagens Næringsliv AS and / or our suppliers. We would like you to share our cases via a link, which leads directly to our pages. Copying or other use of all or part of the content may only be done with written permission or as permitted by law. For more terms, see here.
