Foreign exchange risk
The Company operates internationally and is exposed to foreign exchange risk arising from transactional currency exposures, primarily with respect to the euro, Singapore dollar, and Brazilian real. The exposure arises from sales or purchases in currencies other than the Company’s functional currency. The Company uses forward currency contracts to eliminate the currency exposure once the Company has entered into a firm commitment of a project contract.
For foreign currency risk, the principle terms of the forward currency contract (notional and settlement date) and the future expense or revenue (notional and expected cash flow date) are identical. The Company has established a hedge ratio of 1:1 for all its hedging relationships.
The main Company’s exposure to foreign currency risk is as follows based on notional amounts:
Foreign exchange risk (summary)
31 December 2022 | 31 December 2021 | |||||
|---|---|---|---|---|---|---|
in millions of local currency | EUR | SGD | BRL | EUR | SGD | BRL |
Fixed assets | 133 | - | 274 | 57 | - | 84 |
Current assets | 99 | 3 | 606 | 82 | 3 | 398 |
Long-term liabilities | (105) | - | (685) | (19) | - | (577) |
Current liabilities | (183) | (9) | (1,251) | (166) | (6) | (743) |
Gross balance sheet exposure | (55) | (6) | (1,055) | (46) | (3) | (837) |
Estimated forecast sales | 27 | - | - | 40 | - | - |
Estimated forecast purchases | (1,673) | (383) | (1,779) | (977) | (237) | (2,542) |
Gross exposure | (1,701) | (388) | (2,834) | (983) | (240) | (3,379) |
Forward exchange contracts | 1,831 | 390 | 2,799 | 1,000 | 241 | 3,281 |
Net exposure | 130 | 1 | (35) | 17 | 1 | (97) |
The increase of the EUR and SGD exposure results from FPSO ONE GUYANA under construction in 2022. The decrease of the BRL exposure is the result of progress on FPSO Sepetiba, FPSO Almirante Tamandaré and FPSO Alexandre de Gusmão.
The estimated forecast purchases relate to project expenditure and overhead expenses for up to three years. The main currency exposures of overhead expenses and Brazilian operations are hedged at 100% for the coming year, between 66% and 100% for the year after, and between 33% and 100% for the subsequent year depending on internal review of the foreign exchange market conditions.
Foreign exchange risk (exchange rates applied)
2022 | 2021 | 2022 | 2021 | |
|---|---|---|---|---|
Average rate | Closing rate | |||
EUR 1 | 1.0530 | 1.1827 | 1.0666 | 1.1326 |
SGD 1 | 0.7253 | 0.7442 | 0.7459 | 0.7413 |
BRL 1 | 0.1939 | 0.1856 | 0.1892 | 0.1795 |
The sensitivity on equity and the income statement resulting from a change of 10% of the US dollar’s value against the following currencies at December 31, would have increased (decreased) profit or loss and equity by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis as for 2021.
Foreign exchange risk (sensitivity)
Profit or loss | Equity | |||
|---|---|---|---|---|
10% increase | 10% decrease | 10% increase | 10% decrease | |
31 December 2022 | ||||
EUR | (0) | 0 | (189) | 189 |
SGD | (0) | 0 | (29) | 29 |
BRL | (0) | 0 | (33) | 33 |
31 December 2021 | ||||
EUR | 0 | (0) | (108) | 108 |
SGD | (0) | 0 | (18) | 18 |
BRL | (0) | 0 | (43) | 43 |
As set out above, by managing foreign currency risk the Company aims to reduce the impact of short-term market price fluctuations on the Company’s earnings. Over the long-term however, permanent changes in foreign currency rates would have an impact on consolidated earnings.