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Interview

with Arne Westeng, Managing Director, Bayerngas Norge

13.04.2009 / Energyboardroom

To begin, would you please introduce the company to our readers?

Bayerngas Norge is different from many other players in that we are municipal workers and have municipal owners. The company is mainly interested in reserves and production of gas, which stands in contrast to other small newcomers of E&P companies building a portfolio with the hopes of someone buying them. The main incentive behind entering the Norwegian market is that Norway is one of the main suppliers of oil and gas to the European continent, and particularly towards the south there is more dependence on Russian oil and gas. Therefore, our owners want to go upstream to diversify and secure their supplies. In the early days, everything was nice and easy in the business, with a gas monopoly in Norway. I was one of the members of the monopoly in Saga Petroleum, which was selling gas to Ruhrgas, which in turn sold to Bayerngas. Both companies got their margins, there were no problems, and everyone was making money. This is not how it works today, which is partially the reason why shareholders of Bayerngas want to go upstream.

Bayerngas Norge has of four owners: Bayerngas GmbH, Stadtwerke München, Swissgas in Switzerland, and TIGAS-Erdgas Tirol, which are municipal companies. In going upstream, they’re all taking more risk, while hopefully also earning more revenues. It’s a question of commercial and physical hedge, and ideally our shareholders want to have their gas molecules delivered in Bavaria, Innsbruck, or Bern. Concerns around security of supply, illustrated by the recent conflict in the Ukraine, have created an opportunity for shareholders to invest in related businesses, and companies like Stadtwerke München have depreciated power plants and very nice cash flows.

Bayerngas Norge’s short term production goal is 2bcm in 2012. Formally, the company began in 2006, but there was no own organization until 2007 when we started from scratch with one asset in our portfolio. From then on, Bayerngas Norge has bought a number of licenses in Norway, established a daughter company and bought Petro-Canada’s portfolio in Denmark, acquired PA Resources Norway in December of 2008 and Statoil’s company in Denmark just recently. Bayerngas Norge now has one field on production, three fields in development, two fields considered for development and a total exploration portfolio of 10-15 licenses.

Many foreign utilities have entered Norway and aggressively acquired assets, and Bayerngas Norge is no exception. What is it about Norway that makes it so attractive?

First of all, it’s the reserves and reserve potential, which are still far higher than in surrounding areas. Bayerngas would have had to enter much more high risk environments to find these kinds of reserves elsewhere. It comes down to proximity to market and resource potential.

When you entered in 2007, how was it to build the organization from scratch on upward?

It was difficult as I had never done it before. We didn’t use headhunters, and thus recruited purely based on networking, making contacts wherever possible, while remembering Oslo is different than Stavanger. There are more oil people in Stavanger, but it’s not a very large city. Oslo and the vicinity are about 1 million. Therefore, what could be called the “intellectual capital” in Oslo is far bigger. It’s also a fact that quite a few people prefer the Oslo climate by comparison, which further makes it easier to recruit. That was the basis for deciding on Oslo as the home base, not withstanding the people from Oslo working in Stavanger who are more than happy to return to their roots.

How has this growth trajectory proceeded?

Bayerngas Norge is still an “oil mosquito”. However, we have been conveying that we’re 100% reliable, that when we say something in negotiations we stick to it. And we are fast. Having worked for another German company as well, I’m aware that systems and processes can be quite lengthy. When we started here, our mother company Bayerngas GmbH established a set of rules between ourselves and the shareholders, and the rule is that if we are making a proposal of small or medium size, the board has five days to give their acceptance. Big acquisitions have a maximum of 10 days. The board has always stuck to the rules, and if any deviation from the rules occurs, it’s in giving much less time than promised! This fast decision-making has been absolutely instrumental in making acquisitions, particularly in the case of PA Resources, which was in a commercial bind and needed money at a specific point in time. Bayerngas Norge entered very late in the process, performed due diligence assessment, and could tell the owners of PA Resources that we would make all the necessary decisions in time. In fact, the first time the board was informed of the purchase opportunity was on the 24th of November on the regular board meeting, and the $220 million deal was signed on December 1st.

You mention the goal of 2bcm production by 2012. One step in that direction is to access more remote gas reserves, and to this end, Bayerngas Norge has partnerships to enable remote gas production with SINTEF.

You have to distinguish between short term activities in order to grow the business and the long term perspective. Of course, Bayerngas Norge has a long term perspective of being in Norway, and therefore wants to explore opportunities to produce gas in the most cost-effective and efficient manner, which explains our involvement in such projects. We are also interested in, but haven’t spent much money on, gas hydrates, which is a long shot. These are long term projects that have no impact on the planning process or the profile of reserves, but in the long run, we are looking for more efficient ways to produce gas. There are a lot of nice, small, gas reserves around. For instance, Bayerngas Norge is a partner with Statoil in two nice, small, top quality gas fields in the Norwegian Sea, but there is no capacity to get these volumes on stream, which means these volumes are stranded at the moment. If there were efficient ways of getting such volumes to the market, that would be ideal, and explains our involvement in such projects.

What are your biggest priorities as Managing Director here in Norway?

In the last few months, merging the two organizations in an efficient manner has been at the top of the list. At the outset, it should’ve been a simple job: two small organizations of equal size and similar portfolios. However, we needed to organize, distribute, and clarify responsibilities between the various units, and it’s also my experience that even with the relative youth of both companies, at 2.5 and 4 years for Bayerngas Norge and PA Resources respectively, there is still a difference in cultures. Now, we are trying to give everybody the same identity and create the same culture, with Erik Eriksen, our Admin Manager, charged with the task of finding solutions to get everybody under one roof as quickly as possible.

What is the ideal culture for this new entity?

Our municipal owners have a lot of faith in what we’re doing, perhaps even more than they should! Therefore, it’s very important that we manage their money in the best possible manner, representing municipal interests with politicians on their boards which cannot afford to make mistakes or take high risks. This explains why we haven’t seen high organic growth via risky exploration as the only way forward. Although exploration is important and we will do a lot of it, the basis has to be reserves, which is why Bayerngas has bought reserves from Revus and other companies who have made discoveries but don’t have the resources to develop them. Bayerngas Norge has purchased them, and taken our share in development investment, and consequently built a portfolio and some robustness, and not relying on just a few developments which could be delayed due to technical accidents or engineering problems.

As part of our culture, Bayerngas Norge believes it’s important that the way we are internally is compatible with our shareholders. Being municipal companies, they are not big spenders. They have a sound financial situation, but traditionally take good care of the money because they’re spending the funds of the population in the area. It’s important for Bayerngas Norge to convey that attitude and make it clear to all the employees. We don’t try to show off externally or build extravagant offices. We have no company cars. People make good salaries, but there are no fancy bonus systems or the like. Personally I don’t believe in such systems, and I don’t think they work; further, they don’t fit with the culture.

If not financially, how are people in Bayerngas Norge motivated?

Salary must be enough so people are satisfied, but the motivation is through recognition and performance, that we are really creating results, recognized by shareholders and the community. In the end, this approach works much better than bonuses. In our business, bonuses are counterproductive, because I haven’t seen anybody who has been able to design a bonus system that works long term. Our business is too complicated to be able to, at the start of the year, define exactly where you want to be at the end. With bonuses, it’s possible to manipulate the system towards overbudgeting or overacquiring. In sum, it’s simply just too difficult to define the proper criteria – in the short term it’s easy, but not in the long term.

Speaking to the long term, in the next five to 10 year time horizon, where do you want to bring the company in Norway?

Bayerngas Norge wants to satisfy its owners. When we reach the 2bcm target in 2012, we set ourselves a new goal. Reading the German newspapers, interviews with the head of Stadtwerke München have spoken of turnover in the gas volumes being sold to the market in Bavaria to be at least compensated by upstream production, in theory being 100% self-sufficient, to the point that the share of the production in Bayerngas is so large that it’s the equivalent to what he’s selling in Bavaria. This is the goal from a commercial point of view and a security of supply point of view. That’s what Bayerngas Norge is trying to achieve, and also why we haven’t set a figure for where we want to be, for example, in 2015. However, I would expect it to be significantly higher than in 2012.

What is your final message to OGFJ readers about Bayerngas’ ambitions to move beyond the oil mosquito?

Bayerngas Norge has been active and will continue to be active if we see the right opportunity. The company needs a larger exploration portfolio. The licensing round system is probably too slow for us, and we may need to acquire companies to acquire licenses. However, it’s not so important whether we are bigger or smaller than other companies. What’s important is that we perform, stay true to purpose, and rely on ourselves for common sense and strong motivation. Bayerngas wants to grow, but we want to do it prudently, by building a sound portfolio, preferably in gas that we can bring to the market. And if we can land it in Germany, all the better!

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