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Interview

with Aad Groenenboom, Partner, PricewaterhouseCoopers Nederland

21.02.2010 / Energyboardroom

PWC is present not only in every relevant Oil and Gas market worldwide, but also in every corner of the Netherlands, with offices in every major city in the country. How is such a well-established presence reflected in your relationship with the local Oil and Gas industry?

PWC’s relationship with the Dutch Oil and Gas industry primarily involves assistance with regulation and tax issues, and support with strategic decisions in areas such as security of supply as well as country and companies’ risk management.

Risk management also goes beyond the basics; it involves control issues and assessment of systems and processes in place given our background as an accounting firm. This background gives us a very important edge that, together with our unique IT expertise, makes PWC the leader in the Dutch energy sector. Needless to say, being the market leader also gives us the increased responsibility of ensuring that we do not provide advisory services in certain areas where the client firm is also audited by us.

How has the current financial and economic crisis affected PWC’s activities in the Netherlands, especially in the Oil and Gas arena?

PWC’s total revenue from the Oil and Gas sector is still growing significantly regardless of the recession. This has to do with the fact that PWC has a strong position in audit and the amount of audit and assurance services has kept up a strong demand even during the crisis.

The advisory services have been affected more significantly since major Oil and Gas companies have implemented cost-saving programs. However, since PWC also provides cost-saving solutions, the crisis has also brought about interesting opportunities in this area. Finally, demand has remained high for our tax services, meaning that overall PWC has managed to maintain its growth at double-digit rates and further establish itself as the market leader.

After 50 years of exploration it is natural that the Dutch Oil and Gas industry is now facing further depletion of the national fields. In order to overcome this scenario the industry, and the country, is trying to reinvent itself and – among other things – become the Gas Roundabout of North-Western Europe. How viable is this project when you also have other interesting options such as Belgium and Germany that could play the same role?

The Netherlands clearly has the edge over the others for becoming the European Gas Roundabout. It has built up its infrastructure and expertise over more than 50 years. The infrastructure created around Groningen was then connected to the growing offshore explorations, making them more sustainable since the costs of linking these new explorations to the existing infrastructure was much smaller than starting from scratch.

Now that we have reached certain depletion levels of the national fields onshore and offshore it is prudent to rethink the security of supply; the European Gas Roundabout is thus a project which would both use the infrastructure and expertise already in place and guarantee the long-term security of supply for the Netherlands and Europe.

The Netherlands’ privileged location also plays a decisive role in becoming the European Gas Roundabout. With the Nordstream pipeline being planed via the Baltic to Germany and its eventual connection to the Netherlands bringing important volumes from Russia; with the pipelines connecting the Netherlands with the UK, which has become a net importer of gas; with the still relevant internal production and infrastructure in place; and with the number of LNG terminals and gas storage projects underway, no other country can play the role of a gas roundabout as the Netherlands can. The Dutch have to take advantage of the intellectual capital as well as the physical assets already in place and strengthen the country’s position as the energy hub of Western Europe.

Many in the industry either doubt Russia’s reliability as a gas provider or its capacity to deliver gas according to its future commitments. What’s your assessment of the advantages and disadvantages of counting on this important source of supply?

The first debate is over whether or not Russia is reliable enough to deliver the gas to Europe – in this case to the Netherlands. To this I would say yes because of the long-standing relation between Russian and Dutch companies and governments; there has never been an incident between them. The Russians do understand that gas exports are a big asset for them and in order to be in the business you need to be pretty reliable. They realize that as well, thus I’m quite confident that we can do business with them in a normal way.

That doesn’t mean to say that for the Gas Roundabout we should be allowing ourselves to be fully dependent on one source – Russia. Instead we should consider diversifying our sources of supply. I am very much in favor of Minister Maria van der Hoeven’s current strategy of developing relationships with other countries to try to get supply of gas from there, such as Algeria, Qatar – with LNG – and so on.

The current LNG terminals being built in the country are another important source of future gas supply that will bring further security of supply for the continent as a whole. Besides that, LNG terminals gradually move the gas market away from oil prices, giving it a greater flexibility and creating a stronger gas-to-gas pricing system.

Last but not least, the Bergemeer Gas Storage project will provide the capacity to store gas and make use of price fluctuations in the market, perfecting the existence of a gas market in the Netherlands that adapts to the short-term ups and downs of demand. Thus, in order for the Gas Roundabout to be fully-functioning, all these elements need to be accounted for, and only the Netherlands can offer all of them at once.

Still some of these investments, especially the LNG terminals, were strongly hit by recent market evolutions, such as the oversupply of LNG caused by the decrease in the American demand for the product. With so many large-scale projects trying to bring more gas to Western Europe, how can you be sure that the same won’t happen again?

I think we can be sure, since these projects are aimed at long-term objectives. The developments you mention are short-term: the shale gas activities in the USA increased gas production and thereby lessened the US demand for LNG from the Middle East, temporarily running down prices in the gas market. However I see this as a temporary development in the market and believe that the market shall restore itself, I particularly believe that there will be growth in the demand for gas in the future, more so than for oil. Therefore, the demand will increase and prices will once again become very interesting.

The level of demand and the need for sufficient resources and security of supply will return. And let’s be honest, in this industry you need to invest for 30 years or more – that’s your horizon – you do not invest looking only 5 years in advance. You have to have this view and in that respect these short-term developments shouldn’t discourage investors to keep on with their projects.

As you mentioned, in the future gas prices in continental Europe will probably be independent from Oil prices, a trend that has started with the European gas market liberalization in 2003. However, according to some this process is taking too long and a quicker transition would be less painful for both producers and consumers. But this is far from a consensus opinion and many fear a complete market liberalization UK style. What’s your assessment on this issue?

Indeed, the way the whole gas structure in the Netherlands was set up and the existence of long-term contracts between suppliers and customers is something that you cannot be changed overnight. However, there has been an unbundling process in the gas market as well. Thus, GasUnie has been split and GasTerra has set up a TTF spot market for gas that already adds to the liquidity of the market.

Yes, it is only a first step, it doesn’t bring about full liquidity of the entire gas market yet, but still it’s a first step. Furthermore, the LNG coming in will give a boost to develop a gas to gas market and increase the liquidity of the market. Some people ask for an abrupt liberalization, but due to its long-term nature the developments in this industry are slow, hence it is natural that changes are gradual and lengthy processes. But things are changing.

Another pillar of the European Gas Roundabout project is the continuation of the Netherlands as a gas producer. However, many majors have been leaving the country in search of more profitable fields elsewhere and juniors are left with the task of drilling until the last whisper. How successful are juniors replacing majors and how can PWC assist them in doing so?

The North Sea is notably made up of smaller fields where large economies of scale are not possible; hence some majors are indeed leaving the area in search of more profitable areas. However the infrastructure which is already in place both onshore and offshore makes new developments considerably cheaper in the Netherlands than in frontier areas; this is more likely to benefit the junior companies who have a more limited scope of action rather than majors such as Shell and BP.

However, the majors’ leaving is not in the interests of the Netherlands. I have always encouraged the Dutch government to facilitate the activities in the North Sea through financial incentives. Until a few years ago the industry and the government had an arrangement where accelerated depreciation was allowed and incentivized operations via tax as well as other incentives, but that was suddenly stopped.
This policy (the Fallow Field Policy) should be restored in order that major and juniors can actually explore all remaining gas reserves available and avoid leaving important resources untapped once the infrastructure in place expires.

This is one of the countries where the State gets a very high percentage of tax income from the Oil and Gas E&P; it also brings a lot of employment which we wouldn’t like to see wasted. Thus, in my view schemes like accelerated depreciation and subsidies to the full exploration of our assets are definitely worthwhile.

Last pillar – Human Resources, the Dutch expertise as you said before. PWC has joint projects with local academic institutions such as the Energy Delta Institute – how do you assess the Dutch expertise and how are companies capitalizing on these advantages?

Together with the Energy Delta Institute and the University of Groningen PWC has set up a unique Master of Finance Control in the Energy Sector. The novelty of this Masters course is that more than 35% of its content is directly energy related, with the rest being finance.

The Masters has attracted a rather international crowd with students from both IOCs and NOCs. The main reason why PWC participates in this project is because we understand the challenges that our clients IOCs and NOCs face in terms of human resources. IOCs have the problem of the post-war generation retiring and leaving an experience gap within the companies which needs to be filled. You can have that gap filled quicker by having an academic Masters like ours and an internship program within the company. NOC’s have a different problem since as state-owned companies they don’t have the exposure to international markets. Now that they are becoming much more international they can use our knowledge and experience in the world of international finance.

This mix of different nationalities and backgrounds contributes to the quality and comprehensiveness of the Masters in its own right. The expertise being nurtured here is actually the most important pillar of the Gas Roundabout and every other project that intends to reinvent the Oil and Gas industry in the Netherlands will count on the strength of the Dutch expertise. This is something that both national and multinational companies can and should capitalize on. PWC, as usual, has shown them the way.

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