General information relevant to risks

StatoilHydro's business activities naturally expose the group to risk. The group's approach to risk management includes identifying, evaluating, and managing risk in all activities using a top-down approach with the purpose of avoiding sub-optimisation and utilising correlations observed from a group perspective. Only summing up the different market risks without including the correlations will overestimate our total market risk. Due to this the group utilises correlations between all the most important market risks, such as oil and natural gas prices, product prices, currencies, and interest rates, to calculate the overall market risk (i.e. utilize the natural hedges embedded in our portfolio). This approach also reduces the number of unnecessary transactions (i.e. reducing transaction costs and avoiding sub-optimisation).

In order to achieve the above effects, the group has centralized trading mandates such that all major/strategic transactions are co-ordinated through our Corporate Risk Committee. This implies that local trading mandates are relatively small.

The group's Corporate Risk Committee which is headed by the Chief Financial Officer and which includes, among others, representatives from the principal business segments is responsible for defining, developing, and reviewing the group's risk policies. The Chief Financial Officer in co-operation with the Corporate Risk Committee is also responsible for overseeing and developing StatoilHydro's Enterprise-Wide Risk Management and proposing appropriate risk adjusting measures at the corporate level. To help facilitate its role, the Committee meets at least six times per annum and regularly receives risk information relevant for the group from our Corporate Risk Department.

Financial risks

StatoilHydro's activities expose the group to financial risks as defined by IFRS 7:

• Market risk (including commodity price risk, interest rate risk, currency risk, and equity price risk)
• Liquidity risk
• Credit risk
• Market risk

StatoilHydro operates in the worldwide crude oil, refined products, natural gas, and electricity markets and are exposed to such market risks as fluctuations in hydrocarbon prices, foreign currency rates, interest rates, and electricity prices that can affect the revenues and costs of operating, investing and financing. These risks are managed primarily on a short-term basis with focus on achieving the highest risk adjusted returns for the group within the given mandate. Long-term is generally viewed as risks managed at the corporate level and (or) normally having a six months or longer time horizon for significant volumes while short term is generally viewed as risks managed at segment and lower levels according to trading strategies and pre-defined mandates.

The group has established guidelines for entering into contractual arrangements (derivatives) in order to manage our commodity price, foreign currency rate, and interest rate risk. The group uses both financial and commodity-based derivatives to manage the risks in overall earnings and the future value of cash flows.

Commodity price risk

Commodity price risk represents the group's most important short-term market risk and is monitored everyday against established mandates as defined by the group's governing policies. To manage short-term commodity risk, the group enters into commodity-based derivative contracts, which consist of futures, options, over-the-counter (OTC) forward contracts, market swaps and contracts for differences related to crude oil, petroleum products, natural gas and electricity.

Derivatives associated with crude oil and petroleum products are traded mainly on the InterContinental Exchange (ICE) in London, the New York Mercantile Exchange (NYMEX), the OTC Brent market, and in crude and refined products swaps markets. Derivatives associated with natural gas and electricity are mainly OTC physical forwards and options, Nordpool forwards, and futures traded on the NYMEX and ICE.

The term of oil and refined oil products derivatives is usually less than one year and the term for natural gas and electricity derivatives is usually three years or less.

Currency risk

Fluctuations in exchange rates can have significant effects on the group's results. Foreign exchange risk is assessed on a portfolio basis in accordance with approved strategies and mandates and the group uses only well-understood, conventional derivative instruments which include futures and options traded on regulated exchanges, OTC-swaps, -options and forward contracts.

The group's cash inflows are largely influenced by USD while the group's cash outflows are to a large extent, tax and dividend payments in NOK, as well as certain investments, payment of salaries and various other costs payable in NOK. Accordingly, a significant portion of our exposure to foreign currency rates exists with USD versus NOK. StatoilHydro seeks to manage this currency mismatch by issuing or swapping non-current financial debt into USD.

The group further seeks to manage short-term currency mismatches by using derivative instruments both for currency and liquidity management purposes. Typically, the group purchases NOK during the course of a calendar year in order to cover projected NOK payments of Norwegian income taxes and dividends in the first half of a subsequent year. This means, from time to time, the group purchases substantial NOK amounts on a forward basis using derivative instruments.

Interest rate risk

The existence of assets earning and liabilities owing variable rates of interest expose the group to cash flow risk caused by market interest rate fluctuations. The group enters into various types of interest rate contracts in managing interest rate risk. The group enters into interest rate derivatives, particularly interest rate swaps, to alter interest rate exposures, to lower expected funding costs over time and to diversify sources of funding. Under interest rate swaps, the group agrees with other parties to exchange, at specified intervals, the difference between interest amounts calculated by reference to an agreed notional principal amount and agreed fixed or floating interest rates.

StatoilHydro principally manages the group's interest rates on the basis that the non-current debt portfolio has floating rate interest payments. The modified duration (the percentage change in value for one percentage point change in yield) expresses the way the group monitors the interest rate risk. Generally, the group's modified duration is to be between 0 and 1.0%. Other strategies can be approved from time to time if justified by factors such as corporate risk considerations, tax considerations, large non-recurring transactions, credit rating concerns, etc.

Liquidity risk

Liquidity risk is the risk that StatoilHydro will not be able to meet obligations when due. The purpose of liquidity and short term liability management is to make certain that the group at all times has sufficient funds available to cover financial obligations.

StatoilHydro's operating cashflows are negatively impacted by declines in oil and gas prices, however, during 2008 the group's overall liquidity position remained strong and the policies for managing liquidity remained unchanged.

StatoilHydro's business activities normally generate, on a monthly basis, a positive cashflow from operations. However, in months when taxes are paid (February, April, June, August, October and December) or annual dividend is paid (typically in May/June) cashflows are typically limited. In the period following tax and dividend payments the amount of liquid assets will often be significantly reduced. A need for short-term funding will then be triggered for a period until the debt is repaid and subsequently followed by a new accumulation of liquid assets.

Short-term financing can be carried out bilaterally through direct borrowing from banks, insurance companies, etc. An alternative is to issue short term debt securities under one of the existing financing programmes or under documentation established ad hoc. These financing programmes are as follows:

• A USD 4 billion US commercial paper programme. This is the most flexible programme used for working capital, including timing issues on corporate tax and dividend payments, as well as for periodic acquisition financing.
• A USD 2 billion committed multi-currency revolving credit facility from international banks, including a USD 500 million swing-line facility. The facility was entered into in 2004, and is available for draw-downs until December 2011. This facility is primarily intended as a "back-up" facility for the US commercial paper programme, and should be regarded as support for the credit rating of this programme.
• Uncommitted credit lines. Short-term financing source occasionally required beyond the other short-term programmes and accumulated cash.

In order to have access to sufficient liquidity at all times, StatoilHydro defines and continuously maintains a minimum liquidity reserve which comprises unused committed external credit facilities, cash and cash equivalents, and current financial investments excluding the current portion of the investment portfolio held by the group's captive insurance subsidiary.

Capital and liability management

As a basic principle, StatoilHydro separates investment decisions from financing decisions. Financing needs arise as a result of the group's general business activity. The main rule is to establish financing at corporate level. Project financing may be applied in cases involving joint ventures with other companies.

The group aims at all times to maintain access to a variety of financing sources, both in respect of instruments and geography, and maintain relationships with a core group of international banks that provide various kinds of banking and financing services.

The group has credit ratings from Moody's and Standard & Poor's and the stated objective is to have a rating at least within the single A category. This rating ensures necessary predictability when it comes to funding access at favourable terms and conditions. The group's current long-term ratings are Aa2 and AA- from Moody's and Standard & Poor's respectively. The short-term rating from Moody's is P-1 and A-1+ from Standard & Poor's. The group intends to keep financial ratios relating to debt at levels consistent with objectives for maintaining the group's long-term credit rating at least within the single A category. In managing the group's capital structure and thus seeking to maintain a credit rating of at least single A, the group partly relies on the use of Standard & Poor's guidelines to test, among others, the key ratios free funds from operations over net debt and the debt ratio.

In order to control the group's refinancing risk, the maturity and redemption profile of non-current debt issued is managed within certain limitations. The limits are expressed as maximum annual mandatory redemptions as a share of StatoilHydro's capital employed.

Liquidity forecasts serve as tools for financial planning. In order to maintain necessary financial flexibility, StatoilHydro has requirements for maximum (forecasted) current debt and minimum (forecasted) liquidity reserve. Issuance of long-term debt is used as a tool for reducing current debt and/or increasing the liquidity reserve. New non-current funding will be initiated if liquidity forecasts reveal non-compliance with given limits, unless further detailed considerations indicate that the non-compliance is likely to be very temporary. In this case, the situation will be further monitored before additional non-current debt is drawn.

For further information on the group's debenture bonds, bank loans, and other debt portfolio profile, see note 20 Non-current financial liabilities.

StatoilHydro's dividend policy includes providing a return to the group's shareholders through cash dividends and share repurchases. The level of cash dividends and share repurchases in any one year can fluctuate depending on the group's assessment of future cashflows, capital expenditure plans, financing requirements, and appropriate financial flexibility. See note 19 Shareholders equity for additional information on the group's dividend policy.

Credit risk

Credit risk is the risk that the group's customers or counterparties to financial instruments will cause the group financial loss by failing to honour their obligation. Credit risk arises from credit exposures with customer accounts receivables as well as from derivative financial instruments and deposits with financial institutions. Theoretically, the group's maximum credit exposure for financial assets is the aggregated balance sheet carrying amounts of financial investments (excluding equity investments of NOK 6.5 billion in 2008 and NOK 7.5 billion in 2007), derivative financial instruments, financial receivables, trade and other receivables, and cash and cash equivalents. The group manages this exposure through its credit risk management policies and procedures.

The current financial crisis has brought into focus the need for all entities to have robust credit policies with close monitoring of associated risks. Over the years, we have established a clear credit policy which has proven especially valuable during this period of widespread financial pressure. The tools StatoilHydro uses to manage and monitor credit risk have been tested by the continuing crisis and no significant credit losses have materialised for the group during 2008.

Key elements of our credit risk management approach include

• A global credit risk policy
• Credit mandates
• Internal credit rating process
• Credit risk mitigation tools
• Continuously monitoring and managing credit exposures

Prior to entering into transactions with new counterparties, the group's credit policy requires all counterparties to be formally identified, approved, and assigned internal credit ratings as well as exposure limits. Once established, all counterparties are re-assessed minimum annually with high risk counterparties reviewed more frequently. The internal credit ratings reflect our assessment of the counterparties' credit risk and are similar to rating categories used by well known credit rating agencies, Standard & Poor's and Moody's. Exposure limits are determined based on assigned internal credit ratings combined with other factors, such as expected transaction and industry characteristics, as outlined in our credit policy. The mandate for setting credit limits is regularly reviewed with regard to changes in market conditions.

There are several instruments available to the group to reduce or control credit risk both on an individual counterparty and portfolio level. The main tools used by StatoilHydro are variations of bank and parental guarantees, prepayments and cash collateral. For bank guarantees only investment grade international banks are accepted.

StatoilHydro manages credit risk both on a portfolio and counterparty level. The group has pre-defined limits regarding the minimum average credit rating allowed at any given time on the group portfolio level as well as maximum credit exposures for individual counterparties. The group monitors the portfolio on a regular basis and individual exposures versus limits on a daily basis. The total credit exposure portfolio of StatoilHydro is well diversified with respect to number and quality of counterparties, industries and geographically. The majority of the group's credit exposure is typically with investment grade counterparties.

The following table contains the fair market value of open non-exchange traded derivative assets split by the group's assessment of the counter-party's credit risk.

	At 31 December
(in NOK million)	2008	2007
Counter-party rated:
Investment grade, rated A or above	21,727	19,647
Other investment grade	7,094	928
Non-investment grade or not rated	761	689

As of 31 December 2008, NOK 10.1 billion is received in cash as collateral to offset a portion of this group credit exposure. See note 24 Current financial liabilities for more information on collateral held.


Consistent with our policies, commodity derivative counter-parties have been assigned credit ratings corresponding to those of their respective parent companies. If the parent company is highly rated, it may not be necessary to obtain a parent company guarantee from such a counter-party.