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Financial risk and capital management | 12 Months Ended
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Dec. 31, 2020
Financial risk and capital management [Abstract] |
Disclosure of financial risk and capital management [text block] | 5 Financial risk and capital management General information relevant to financial risks Equinor's business activities naturally expose Equinor to financial risk. Equinor’s approach to risk management includes assessing and managing risk in activities using a holistic risk approach, by considering relevant correlations at portfolio level between the most important market risks and the natural hedges inherent in Equinor’s portfolio. This approach allows Equinor to reduce the number of risk management transactions and avoid sub-optimisatio n. The corporate risk committee, which is headed by the chief financial officer, is responsible Equinor’s Enterprise Risk Management and proposing appropriate measures to adjust risk at the corporate level. This includes assessing Equinor’s financial risk policies. Financial risks Equinor’s activities expose Equinor to m arket risk (including commodity price risk, curren cy risk, interest rate risk and equity price risk), l iquidity risk and c redit risk. Market risk Equinor operates in the worldwide crude oil, refined products, natural gas, and electricity markets and is exposed to market risks including fluctuations in hydrocarbon prices, foreign currency rates, interest rates, and electricity prices that can affect the revenues and costs of operating, inv esting and financing. These risks are managed primarily on a short-term basis with a focus on achieving the highest risk-adjusted returns for Equinor within the given mandate. Long-term exposures are managed at the corporate level, while short-term exposur es are managed according to trading strategies and mandates. Mandates in the trading organisations within crude oil, refined products, natural gas and electricity are relatively small compared to the total market risk of Equinor. For more information on sensitivity ana lysis of market risk see note 2 5 Financial instruments: fair value measurement and sensitivity analysis of market risk. Commodity price risk Equinor’s most important long-term commodity risk (oil and natural gas) is related t o future market prices as Equinor´s risk policy is to be exposed to both upside and downside price movements. To manage short-term commodity risk, Equinor enters into commodity-based derivative contracts, including futures, options, over-the-counter (OTC) forward contracts, market swaps and contracts for differences related to crude oil, petroleum products, natural gas and electricity. Equinor’s bilateral gas sales portfolio is exposed to various price indices with a combination of gas price markers. The t erm of crude oil and refined oil products derivatives are usually less than one year, and they are traded mainly on the Inter Continental Exchange (ICE) in London, the New York Mercantile Exchange (NYMEX), the OTC Brent market, and crude and refined produc ts swap markets. The term of natural gas and electricity derivatives is usually three years or less, and they are mainly OTC physical forwards and options, NASDAQ OMX Oslo forwards and futures traded on the NYMEX and ICE. Currency risk Equinor’s cash flow s from operating activities deriving from oil and gas sales, operating expenses and capital expenditures are mainly in USD, but taxes, dividends to shareholders on the Oslo Børs and a share of our operating expenses and capital expenditures are in NOK. Acc ordingly, Equinor’s currency management is primarily linked to mitigate currency risk related to payments in NOK. This means that Equinor regularly purchases NOK, primarily spot, but also on a forward basis using conventional derivative instruments. Inter est rate risk Bonds are normally issued at fixed rates in a variety of currencies (among others USD, EUR and G BP). Bonds are normally converted to floating USD bonds by using interest rate and currency swaps. Equinor manages its interest rates exposure on its bond debt based on risk and reward considerations from an enterprise risk management perspective. This means that the fix ed/floating mix on interest rate exposure may vary from time to time. For more detailed inf ormation about Equinor’s long-term debt portfolio see note 18 Finance debt. Equity price risk Equinor’s captive insurance company holds listed equity securities as part of its portfolio. In addition, Equinor holds some other listed and non-listed equitie s mainly for long-term strategic purposes. By holding these assets, Equinor is exposed to equity price risk, defined as the risk of declining equity prices, which can result in a decline in the carrying value of Equinor’s assets recognised in the balance s heet. The equity price risk in the portfolio held by Equinor’s captive insurance company is managed, with the aim of maintaining a moderate risk profile, through geographical diversification and the use of broad benchmark indexes. Liquidity risk Liquidity risk is the risk that Equinor will not be able to meet obligations of financial liabilities when they become due. The purpose of liquidity management is to ensure that Equinor has sufficient funds available at all times to cover its financial obl igations. The main cash outflows include the quarterly dividend payments and Norwegian petroleum tax payments paid six times per year. If the cash flow forecasts indicate that the liquid assets will fall below target levels, new long-term funding will be considered. Short-term funding needs will normally be covered by the USD 5.0 billion US Commercial paper programme (CP) which is backed by a revolving credit facility of USD 5.0 billion, supported by 21 core banks, maturing in 2022. The facility supports secure access to funding, supported by the best available short-term rating. As at 31 December 2020 the facility has not been drawn. Equinor raises debt in all major capital markets (USA, Europe and Asia) for long-term funding purposes. The policy is to have a maturity profile with repayments not exceeding 5% of capital employed in any year for the nearest five years. Equinor’s non-current financial liabilities have a weighted average maturity of approximately ten year s. Financial markets were volatile in 2020, particular in the first half of the year. Combined with the significant oil price drop and the Covid-19 situation developing rapidly, Equinor decided to issue several bonds. For more information about Equinor’s non-current financial liabilities, including 2020 bond issuance, see note 18 Finance debt. The table below shows a maturity profile, based on undiscounted contractual cash flows, for Equinor’s fina ncial liabilities.
| At 31 December
| 2020 | 2019
(in USD million) | Non-derivative financial liabilities | Lease liabilities | Derivative financial liabilities | Non-derivative financial liabilities | Lease liabilities | Derivative financial liabilities
Year 1 | 13,388 | 1,220 | 1,262 | 13,388 | 1,210 | 204
Year 2 and 3 | 5,528 | 1,598 | 75 | 4,370 | 1,483 | 606
Year 4 and 5 | 6,489 | 772 | 264 | 6,238 | 673 | 175
Year 6 to 10 | 12,401 | 752 | 269 | 8,449 | 892 | 479
After 10 years | 14,614 | 162 | 425 | 10,567 | 349 | 370
Total specified | 52,421 | 4,504 | 2,294 | 43,012 | 4,607 | 1,835
Credit risk Credit risk is the risk that Equinor’s cust omers or counterparties will cause Equinor fi nancial loss by failing to hono r their obligations. Credit risk arises from credit exposures with customer accounts receivables as well as from financial investments, derivative financial instruments and deposits with financial institutions. Prior to entering into transactions with new counterparties, Equinor’s credit policy requires all counterparties to be formally identified and assigned internal credit ratings. The internal credit ratings reflect Equinor’s assessment of the counterparties' credit risk and are based on a quantitative and qualitative analysis of recent financial statements and other relevant business. All counterparties are re-assessed regularly. Equinor uses risk mitigation tools to reduce or control credit risk both on a counterparty and portfolio level. The main tools include bank and parental guarantees, prepayments and cash collateral. Equinor has pre-defined limits for the absolute credit risk level allowed at any given time on Equinor’s portfolio as well as maximum credit exposures for individual counterparties. Equinor monitors the portfolio on a regular basis and individual exposures agains t limits on a daily basis. The total credit exposure of Equinor is geographically diversified among a number of counterparties within the oil and energy sector, as well as larger oil and gas consumers and financial counterparties. The majority of Equinor’s credit exposure is with investment grade counterparties. The following table contains the carrying amount of Equinor’s financial receivables and derivative financial instruments split by Equinor’s assessment of the counterparty's credit risk. Trade and other receivables include 2% overdue receivables for 30 days and more. The overdue receivables are mainly joint venture receivables pending the settlement of disputed working interest items payable from Equinor’s working interest partners within the Explor ation & Production USA – onshore activities. A p rovision ha s been recognized for expected credit losses of t rad e and other receivables using the expected credit loss model. Only non-exchange traded instruments are included in derivative financial instruments.
(in USD million) | Non-current financial receivables | Trade and other receivables | Non-current derivative financial instruments | Current derivative financial instruments
At 31 December 2020 |  |  |  |
Investment grade, rated A or above | 211 | 1,954 | 1,850 | 465
Other investment grade | 24 | 2,288 | 478 | 287
Non-investment grade or not rated | 262 | 3,176 | 148 | 134
Total financial assets | 497 | 7,418 | 2,476 | 886
At 31 December 2019 |  |  |  |
Investment grade, rated A or above | 682 | 2,089 | 962 | 201
Other investment grade1) | 80 | 2,409 | 358 | 270
Non-investment grade or not rated1) | 296 | 2,876 | 44 | 107
Total financial assets | 1,057 | 7,374 | 1,365 | 578
1) Because of an adjusted i nvestment grade classification, the line items Other investment grade and Non-investment grade or not rated has been reclassified for 2019. Under Trade and other receivables, Non-current derivative financial instrument and Current derivative financial instruments, the res pective amounts of USD 2,368 million, USD 44 million and USD 98 million has been moved from Other investment grade to Non-investment grade or not rated. For more information about Trade and other receivables, see note 15 Trade and other receivables. At 3 1 December 2020, USD 1,704 million of cash was held as collateral to mitigate a portion of Equinor's credit exposure. At 31 December 2019, USD 585 m illion was held as collateral. The collateral cash is received as a security to mitigate credit e xposure related to positive fair values on interest rate swaps, cross currency swaps and foreign exchange swaps. Cash is called as collateral in accordance with the master agreements with the different counterparties when the positive fair values for the d ifferent swap agreements are above an agreed threshold. Under the terms of various master netting agreements for derivative financial instruments as of 31 December 2020, USD 3,738 million have been offset and USD 387 million presented as liabilitie s do not meet the criteria for offsetting. At 31 December 2019, USD 1,661 million w ere offset and USD 603 m illion was not offset. The collateral received and the amounts not offset from derivative financial instrument liabilities, reduce the credit exposure in the derivative financial instruments presented in the table above as they will offset in a potential default situation for the counterparty. For trade and other receivables subject to similar master netting agreements USD 1,684 million have been offset as of 31 December 2020, and respectively USD 1,309 million as of 31 December 2019. Capital management The main o bjectives of Equinor's capital management policy are to maintain a strong overall financial position and to ensure sufficient financial flexibility. Equinor’s primary focus is on maintaining its credit rating in the A category on a stand alone basis (ignor ing uplifts for Norwegian Government ownership). Equinor’s current long-term ratings are AA- with a negative outlook (including one notch uplift) and Aa2 with a negative outlook (including two notch uplift) from S&P and Moody’s, respectively. In order to m onitor financial robustness on a day to day basis, a key ratio utilized by Equinor is the non-GAAP metric of “N et interest-bearing debt adjusted (ND) to C apital employed adjusted (CE)”.
| At 31 December
(in USD million) | 2020 | 2019
Net interest-bearing debt adjusted, including lease liabilities (ND1) | 20,121 | 17,219
Net interest-bearing debt adjusted (ND2) | 15,716 | 12,880
Capital employed adjusted, including lease liabilities (CE1) | 54,012 | 58,378
Capital employed adjusted (CE2) | 49,608 | 54,039
Net debt to capital employed adjusted, including lease liabilities (ND1/CE1) | 37.3% | 29.5%
Net debt to capital employed adjusted (ND2/CE2) | 31.7% | 23.8%
ND1 is defined as Equinor's interest bearing financial liabilities less cash and cash equivalents and current financial investments, adjusted for collateral deposits and balances held by Equinor's captive insurance company (amounting to USD 627 million and USD 791 million for 20 20 and 201 9, respectively). CE1 is defined as Equinor's total equity (including non-controlling interests) and ND1. ND2 is defined as ND1 adjusted for lease liabilities (amounting to USD 4,405 million and USD 4,339 million for 20 20 a nd 201 9, respectively). CE2 is defined as Equinor's total equity (including non-controlling interests) and ND2.

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