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Interview

with Gerard Bauer, CEO, LOTOS E&P Norge AS

08.01.2013 / Energyboardroom

Given the depression of European downstream markets in the last few years, several European downstream companies are looking at Norway from an E&P perspective. How does Norway now fit within LOTOS’ overall strategy?

LOTOS is a Polish capital company, one of the largest in Poland. Today the company has very strong strategic focus on exploration and production (E&P). There are limited resources in Poland itself. As a consequence, the group has focused on developing E&P in Norway, medium- and long-term. The company has set an overall production goal of 15,000 bpd for 2015, with a vision of 100,000 bpd in 2020. However, current production counts for approximately 5,000 bpd across Poland and Lithuania. Therefore, reaching these ambitious goals will require substantial production to come from Norway.

The strong commitment from the capital group to invest in the E&P segment shows in establishing the new E&P division in June 2012, headed by Senior Vice President Zbigniew Paszkowicz. The company has committed to invest USD 1.2 billion in the E&P segment in the period 2011-2015. Next year a new strategy until 2020 will be formalized, but I am convinced that production targets and the vision of 100,000 bpd will remain. Of course a significant part of the efforts will go into Norway.

Our approach in Norway will encompass the full E&P spectrum, from exploration and appraisals to development, production and abandonment. At the same time, the Norwegian government invites companies to Norway both for exploration and to develop mature fields. LOTOS started particularly focusing on the re-development of the Yme field. Now we perceive our presence in Norway on a long-term strategy. We will be able to meet our visions in Norway both by organic and inorganic growth, through farm-ins and especially acquisitions.

Lately we have been focusing on our two licenses being drilled this year, especially the “Skagen” prospect. We have started drilling beginning of November. It is a milestone project for LOTOS as it is the first time we will be a fully responsible operator in Norway. Thus we consider it a great achievement for the long-term ambitions of LOTOS. Recently we also participated in drilling the “Geite” prospect, which unfortunately was a dry well. However, it was a valuable experience for us.

In 2009 your predecessor, Henrik Carlsen, held the expectation that the Yme field would become an important field for the supply to your refineries in Poland.

The company is aware of the challenges regarding the “Yme” field to start production as planned. At present we see production deferred significantly. Consequently LOTOS has had to adjust its strategy. We are now active in expanding our portfolio through acquisitions.

You have been in this position for just over a year; what do you see as the key developments for LOTOS over this time?

One of our major achievements has been to make the company ready to drill the Skagen prospect, our first exploration well as operator. We have constantly been working to fulfil the See-to-duty for the Yme redevelopment. In addition I am continuously developing and building the company according to our long-term strategy. We wish to become a strong and reliable member of the Stavanger oil and gas community.

How hard has it been to obtain acceptance in the oil and gas company as a Polish company internationally known more for downstream than upstream?

LOTOS is among many new companies in Norway. We rely on staff very experienced in E&P, with good reputation in the industry. We have clearly communicated our intentions to grow rather than to just engage in short-term projects. We do not only focus on exploration but on becoming a full E&P player on the NCS. I think all this is very well received in Norway and in line with the Norwegian strategic focus on long-term development.

Additionally, the Polish represent the second largest population in Norway, due to the very good relations between the two states for decades. Knowing and accepting each other creates trust, good business relations and commitment from both sides. I have the impression that the Polish LOTOS is also well accepted in Norway.

Why is there a focus on the Norwegian side of the North Sea market as opposed to that of the UK or Denmark?

I would not say that Grupa LOTOS excludes other opportunities. But at the moment the main focus is Norway. Norway is highly ranked with regard to prospectivity and, despite high costs, has a very open and stable business environment. For example, the tax regime is clear, understandable and sustainable. This is important for investments.

The real challenge for LOTOS is to build E&P from scratch. The logical steps taken were to begin at home and to then make a step into another market before expanding beyond this. It will already demand a lot of the company’s dedication and resources to take advantage of the numerous opportunities available in Norway.

LOTOS was successful in the APA round last year, and we are in the middle of the 22nd licensing round at the moment, how are you targeting your asset acquisitions in Norway?

Of course LOTOS was very interested in the 22nd round and the company has been accumulating a substantial knowledge base about the Barents Sea. Ultimately, however, the company decided not to go for any license in the Barents Sea this year due to two reasons.

First of all we wanted to focus on the wells in our portfolio drilled this year, Geite and Skagen. In doing so, we concentrated on proving our value as a reliable and successful operator to the authorities and to the market. The second reason is, that, as a response to the delays on Yme field, LOTOS has opted for temporary inorganic growth with strategic acquisitions designed to help us meet our goals.

As a result, LOTOS has reduced its short-term ambitions for the Barents Sea and the 22nd licensing round, but decided to participate in the APA 2012 and 2013 exploration rounds. Geographically, LOTOS is therefore concentrating its efforts on the North Sea and Norwegian Sea. The Barents Sea is on our radar for the future, but it will need to wait a while until we have proceeded with our current ambitions – hopefully already after next year.

The Skagen prospect is a major step for the company. How have you found the process of adapting to the very strict regulations of Norway and the challenges of the NCS?

My personal opinion is that obtaining consent to drill on the NCS is a complex, complicated process, but necessary and important. The complexities of E&P on the NCS justify all the obligations that have to be met. I am fully convinced that this is the right way to approach regulations in such a challenging environment.

On the other hand there is also a lot of trust which is put into operators. The obligations and regulations actually help the operator as a clear guidance. Norway offers a concise regulatory framework, stimulating exploration and development.

Drilling an exploration well always involves risks. However, risks have to be minimized and handled in a systematic and structured approach. We have qualified employees in our organization working to reduce the risks to a minimum.

Regarding capacity challenges in Norway, how have you found these challenges in preparing for the Skagen development?

The only solution is to plan your work well in time. You must define your strategy and follow it looking many steps ahead instead of just one. We had started contracting and putting together the organization for Skagen already in October 2011. This proved to be the right timing.

Given LOTOS’ current portfolio, the limited contractor market does not create difficulties for us at the moment as we are in a phase of generating interesting projects and prospects for exploration and development. This might be a greater challenge as soon as we identify our exploration drilling as well as potentially in-fill drillings in producing assets.

The cost rates of oil services are, undoubtedly, astonishing in Norway. However, this is the cost of business. You can demand and receive high quality, as well as state-of-the-art technology and services. Introducing this into your company brings added value.

What can LOTOS bring to a license group in terms of its experience from other countries?

LOTOS is certainly benefiting from the expertise of LOTOS Petrobaltic, which is our main parent company and holds all the offshore licenses in the Polish Baltic Sea, bringing in valuable upstream knowledge and experience. Grupa LOTOS is a very modern, developing capital group with state of the art technology, in-depth-knowledge of the downstream business and full commitment to its development in Norway.

Last but not least, we have put together a team of very qualified people, with E&P best practice know-how and international experience from Norway, Poland, Austria, UK, the Netherlands, Pakistan, Kazakhstan and others.

Looking at your ambitions for the next few years, what would you like to have achieved in five years?

Production in the range of 15,000 bopd as part of our 100,000 bpd vision for 2020. In real terms, this means activities in exploration in at least 25 licenses, two to four wells being drilled per year and being active in acquisitions.

What was your motivation to work for a young Polish E&P company in Norway?

As a petroleum engineer Norway is an exciting environment. I always wanted to work in Norway some day. In addition, I have always enjoyed bridging different cultures. Leading and growing the Norwegian-Polish-International team is both challenging and rewarding.

However, my main motivation here is based on the challenge of building an E&P company nearly from scratch. LOTOS Norge E&P AS is a rather young, integrated oil and gas company, but it has developed significantly in recent years, as have many businesses in Poland. Bringing the enthusiasm and ideas of the Polish company into Norway and growing LOTOS to a well-known upstream company in Norway is a very interesting, demanding and satisfying task.

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