with Kare A, Managing Director, Tjonneland, VNG Norge AS
VNG recently acquired the assets of Endeavour – as of May 14th and until the deal’s completion known as VNG (Operations) AS – for $150 million. What led up to this acquisition, and what does it mean to VNG in Norway?
This is the first time VNG has gone upstream. VNG is a downstream company, with activities in pipeline distribution, storage, and selling gas bought mainly from Russia and Norway. In 2005, the company decided to be part of the upstream business, and wanted to do so in Norway because they knew Norway very well and appreciated the stable political system. VNG decided to start a company in Stavanger, and thus VNG Norge was established in July 2006. I joined in August, and the company was qualified in the same month. From there, we started building the organization.
At the time, we observed a big price hike taking place, and believed the only reasonable way of developing the company was through exploration. The tax system in Norway allows a 78% cost recovery while exploring, which meant that this strategy was the simplest for VNG to adopt. The company built up an exploration staff, and won several exploration licenses during this period. We saw the prices rise through 2007 and 2008, and of course the ensuing collapse. A strategy meeting around this time resulted in a shift of plans, because we expected the prices of assets to fall. From this point, VNG became open to buying into assets, and started looking for undeveloped gas resources.
This opportunity was realized through Endeavour. VNG had already partnered with the company in two licenses, and knew them fairly well. VNG examined their portfolio, with potential reserves more than 90% gas. It was a perfect match. That’s why VNG took this opportunity when it came, and so the company was bought. However, as you point out, the merger is not 100% complete, but upon completion the company will be called VNG Norge AS and keep offices in both Stavanger and Oslo.
You were enlisted to take charge of VNG’s transition in Norway from a downstream company to an upstream one. How is the challenge of building up from scratch?
In 2006, when we started to build the company, there was very significant pressure on finding G & G people – everyone was looking for them, so it was tough to recruit these skills to a new company. We succeeded, and I think the reason was that people saw that VNG had strong capital and a good history, so they knew that there was a real interest. In addition, many of the people that came to us wanted to be part of a new company that was starting from scratch, and being part of a small team allows everyone to influence decisions and get a good overall knowledge. That was one of the main reasons we succeeded.
How would you define your personal management style in terms of organizing these people into a new entity?
For me, it has always been important to give a lot of freedom to people, so they can develop their skills. You have to control them a little, but I leave a lot of responsibility with them, which is the only way to get the flower to bloom.
One way of getting more action in the NCS is to acquire new companies, but access to acreage has been one of the main issues we’ve seen with your counterparts. What is the VNG perspective on this matter?
In the early phase, VNG farmed into licenses, and was keen to do this in places where it was possible to have rapid development if we made any discoveries, so the strategy was to look at mature areas where there would be a short leap from development to production. VNG has farmed into three licenses in 2009 where we will drill wells, and now with five from Endeavour, two of which are a shared well, it means VNG will drill seven exploration wells this year. The company wants to grow, and the only way to find gas is to drill; you cannot study forever. Today, VNG counts 29 licenses in total.
When people think of VNG, they think about the well-established German company. How would you define VNG Norge?
The industry in Norway knows VNG fairly well. VNG downstream has bought gas from the NCS from StatoilHydro, Total, and ExxonMobil, among others. When companies look at VNG, they see these people from old East Germany with a very mature human touch. They enjoy life, having got their freedom fairly late. They are very friendly and open. They love to make new contacts, and they are very long-sighted in their aims. They are a little like the Russians in some ways: when they decide to do something they go for it, and allow necessary time to achieve results. That is the way VNG Norge wants to be perceived as a company: we are serious in the things we are doing, when we say something we mean it, and because we are not listed we don’t have to produce results tomorrow. The owners back in Germany want to see results, but on a longer timescale. They have decided to go upstream, and have shown their serious intentions with this purchase. Norway will be the first affiliate to develop, but now they are looking at other countries. Russia is one of these, as well as Northern Africa, Central Asia, and the UK.
VNG in Norway is very growth-oriented. Having started when the labour market was even tighter than it is now, how has recruitment been, not only to a new organization but also within such a tight labour market?
It has been tough, as I said, but we have succeeded. The reason for this is that we have attracted people looking to leave big organizations for smaller ones, where they can have a bigger influence. VNG struggled a little in the beginning, but has gradually started to gather momentum. As you can see, we have a very modern office in the centre of the city, which helps. We have had a lot more enquiries recently, as the market has opened up a bit, and we have become a little more well-known by the industry. Now the situation is totally different.
What are your biggest priorities now as Managing Director?
The biggest priority now is to get the drilling of the wells done this year. One of the wells we are drilling will be operated by Endeavour, and one of our main priorities is to make sure that this goes well. It will be the first well drilled by Endeavour as an operator, and it is important to do this correctly. It’s a very important step for VNG. We must also integrate our two organizations in Oslo and Stavanger, which will be a challenge. Endeavour is an American company, and VNG is German, which only begins to describe where the challenge lies.
What will be your approach toward this integration?
VNG wants to have an open process where people have the chance to influence the integration. As a first step, we are putting together an integration team. It’s a little early because we still have to close the deal, but VNG wants to establish some sub-groups within the organization where everyone can help to shape the outcome. Of course, there are some management decisions to be taken that we cannot leave to the people, such as who will lead the new company, who will be the managers, and where will the main office be. The owner of the company has to decide these things, and that will be done during the summer and autumn.
Speaking to the medium and long-term, on a 5-10 year time horizon, where do you want to bring VNG Norge, and what are your ambitions?
10% of all gas sales that VNG sells in Germany shall come from our own resources by 2020. By then, the group will sell 25bcm of gas per year, so we have said that 2.5bcm will come from our own production. We have said that 1.5bcm will come from Norway, with 1bcm coming from elsewhere.
The prospects that VNG Norge had before the Endeavour acquisition might also lead to discoveries in 2011, with the wells planned for drilling at that time. VNG wants to build its portfolio, and is also looking for undeveloped reserves, so if there is an opportunity we will take it.
What are the most exciting opportunities?
The well that Endeavour will operate will be drilled in the 353 quadrant. There have already been two discoveries in that quadrant by Saga, and this will be very exciting for us. With the shares of VNG Norge and Endeavour combined, we will own 85% of that prospect, which is close to infrastructure and can be developed fairly quickly if a discovery is made. That’s very interesting, and we are looking forward to getting the results – drilling starts in July 2009, so in August we might have some answers.
What is your final message to Oil and Gas Financial Journal readers about VNG, your activities here in Norway, and what we should hope to see in the future?
VNG as a company is not very well known in Europe, or Norway, or the oil and gas business. We wish to grow as an E&P company in the next 15-20 years, not only in Norway, but also in the other petroleum provinces of the world. I hope that within that time, VNG as a group will be well known within in the industry, have a good reputation, and make a solid contribution worldwide.