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Interview

with Kjell Pedersen, President and CEO, Petoro AS

08.01.2013 / Energyboardroom

In the 2012 perspective, you were quoted as saying, “through over-enthusiasm we may neglect the need for timely measures being taken on mature fields.” Would you expand on this and how Petoro’s strategy is evolving in this era of high activity on the NCS?

With regard to the developments over the last couple of years, the Johan Sverdrup discovery in 2010-2011 came as a surprise to the industry as it was extremely large and found in a mature basin. For Norway it has been a rejuvenation. However the intensity of activity has not significantly changed the part of Petoro’s strategy put together back in 2010, which consisted of getting the maximum economic return through mature area optimization and focusing on the gas chain. But we made some adjustments to make sure we also focused on securing the value of new discoveries.

We still believe that, as a company, our primary objective remains in securing the value remaining in the big mature fields and where government shares are very high – ranging from 30 percent to 58 percent. Getting the maximum out of those is key, particularly when many other companies’ focus may be on other opportunities than mature areas. Mature field strategy remains our main concern, although Petoro’s participation in some new discoveries, put an extra stress on prioritization within the this strategy.

The company itself is meant to have a clear financial goal: maximizing the value for the State’s Direct Financial Interest (SDFI). However, we also see Petoro taking a technical role in trying to maximize value and encourage areas for development; to what extent is Petoro’s role still being adapted eleven years after Petoro was founded?

The basic framework of the role has remained intact. Petoro has had the same responsibilities since day one in trying to maximize the value of our portfolio. The way we are set up as a company drives us towards working closely with other companies. This involves taking an active part in the licenses and joining the financial and operational aspects of a project in order to ensure that those aims are being met. Whilst Petoro’s fundamental role has not changed, a changing business environment has led us to strengthen our technical side. Because we have always known that in the mature licenses offshore Norway, which essentially are joint ventures of large international companies, we will only be a credible and convincing partner if we put forward solid arguments from a technical perspective and in a business-like manner. Petoro has always been recognized as a business that works within the industry and is basically doing the same job as every other company in trying to maximize and protect the value of their resources. That is our role – maximizing the value for the owner, which happens to be the government.

Do these private license-holders see you as a company or government institution?

I think Petoro has participated in enough surveys and has enough contacts in the industry that I can say the organization is seen as an industrial partner, which is also how we perceive ourselves. This has been a key framework for the organization and for myself as CEO; we wanted to be an industrial partner, not a political animal or company being run on a different basis to that of the rest of the industry.

You are in charge of $191 billion worth of assets in Norway – how do you ensure that there is a motivation to push this value higher and what are your key performance indicators (KPIs)?

When the company was formed, its creators made it very clear that Petoro was going to be a commercially-oriented organization, and that it should hire business people. When establishing the organization back in 2001-2002, people were hired from 34 different companies, all of them with significant business experience, mostly from large companies operating in the Norwegian oil and gas industry, but also from the finance sector and other business. Personally I came from ExxonMobil, whilst we have other executives from BP, Shell, Statoil, Hydro, and others, and the same goes for most of the people working here.

Given this background, the organization was comfortable with the kind of KPI system we established. This is a balanced scorecard system, which you will find in most other companies in our business, where we measure performance in terms of financial and operational results and in terms of developing our organization as well as our external relations.

You work with the private industry as a partner in these licenses. What is the main contribution Petoro delivers to a license and how do you help your private sector business partners?

All major decisions in the licenses are made by the license group represented by the management committee members of the license-holder companies. There are several ways Petoro as a partner in such joint venture groups can make a difference. Firstly, we have a portfolio that is very large – we are managing shares of 33 producing fields on the NCS. This means we can bring knowledge and experience from our other fields, sharing best practice, if you like. The size of our company (near 70 people) makes it very transparent – information is communicated clearly and efficiently, and we can bring this experience into a very busy partnership that may not have that same ability.

Secondly, although an operator may have thirty people working on the subsurface side of a field, there might only be two or three that work long-term development of the field. The other 27 or 28 will often time be working on a day-to-day basis trying to find out where and how to drill the next well or how to optimize daily production. If Petoro put two or three people to work on the field reservoir, we could be adding significant capacity as well as competence to the group of people that work on the long term prospectus of this field. Two or three full-time people on long-term development can contribute greatly to the development of that project.

Thirdly, Petoro has not experienced any capital constraints in terms of investing in profitable projects in Norway. The government has accumulated huge capital reserves and proved willing to invest as long as projects are financially robust. This was so, even during the financial crisis in 2008-09, when other companies introduced a capital discipline that created some uncertainty even about projects which were considered profitable. Also, with the introduction of many more, but smaller, companies offshore Norway, financial solidity has become more of a topic than before. In some cases small companies struggle to get banks to provide the necessary funds.
In both cases – big companies exercising capital discipline and smaller companies lacking funds – Petoro’s or the government’s financial solidity may be of significance in terms of pushing – or pulling – a license group to make investment decisions. Provided, of course, that the projects are profitable.

We are a small but focused and businesslike organization, which are the most important characteristics in terms of licenses. If we had other KPI’s or economic obstacles to overcome, then we would not be able to influence and assist partnerships as we do.

The last time we interviewed you, you spoke about trying to reduce the cost on the NCS. Do you see this role of trying to reduce cost of the NCS as being in opposition to your role as strictly an investor?

The cost issue is probably the most difficult problem in Norway right now. One of the main cost drivers is the rig rates and the overall cost of drilling. We have had reports showing that reducing the differences in government requirements between the Norwegian and British sectors, could make it easier to move rigs across the border, thereby leveling out some of the cost differences. It is clear that Norway is too costly, compared to other countries and some analysts say the difference between Norway and the UK in drilling cost could be 45%. It is a challenge to actually address the issue and get some real movement in controlling those costs.

We are trying to reduce costs by entering into longer-term contracts on rigs (6-8 years), which we have done with four rigs on Troll. We have together with Statoil set up some specialist rigs (Ex. Cat A, and B) to engage in the lighter elements of drilling or working a well. These are constructed for certain purposes that reduce the cost by having fit-for-purpose tools and higher effectiveness.

With Statoil, we are also pursuing the idea that license groups with a long-term need for production drilling should own mobile rigs themselves. We have always done that on fixed platforms in the fields. By owning the mobile rigs themselves we believe license holders can reduce the costs in those cases when you have a very long term drilling program. However, hiring rigs to drill a well or two, will still be more effective through independent rig owners – that will be the case for the majority of rigs.

Petoro is also trying to encourage investment in new wellhead platforms. This could be a way to ensure faster and more cost efficient drilling, not least on the big mature fields where existing drilling facilities are aging, becoming less efficient and resulting in a slow-down in production drilling which again leads to falling production and a shorter field life.

We are doing a lot to try to reduce the overall cost but some of the fundamental issues as to why Norway has come this high up on the cost curve are difficult to change. We are a rich nation of five million people, we have given ourselves the luxury of being expensive, and we need to ensure that the effectiveness and efficiency of what we are doing is better than most others in order to remain competitive. People often forget that engineering salaries in Norway are still low relative to places like the US and other developed countries. There are certain things you can do in Norway that are very cost-effective but at the same time it is very difficult for other activities, like building a ship or a platform, due to the relatively high cost of welders.

If there is one contribution that Petoro could make to the NCS in the coming five years, what would that be?

The most important thing for us in five years would be to confirm that we were able to justify new investments in existing mature fields and that it was supported by oil companies and done on a sound commercial basis. That would increase the recovery of the fields, improve the profits of the company and increase income to the state in more than one way. I also hope that we would have submitted PDO’s for some of the discoveries that we have made now and that those fields are under development and are ready to contribute. Hopefully we will also be still sitting here talking about producing in excess of one million barrels per year for Petoro and contributing large amounts of capital into the state pension fund, because that is where the oil money ends up. We had a net cash flow of $15 billion in the first half of 2012, and we have been in excess of $18 billion annually for the past few years, sometimes as much as $26 billion in some years and I hope we can continue to contribute funds on that level.

Lastly, we should be drilling wells in areas where we have previously not drilled before. This has to be justified in that the industry is handling the safety and environmental issues in a good way. If we do not, the access to some of those areas will be limited.

Is there anything about Petoro’s activities you would like to share as a last comment?

For international readers or international companies that may not be offshore Norway yet, with new discoveries in many different areas; the remaining reserves potential and potential for IOR; the prospect of an oil well with the stability of the Norwegian energy policy and stable tax system; and the predictability of the state as such, I think that this is probably a place you want to be. And my message to companies that can add competence and experience from cost effective developments and operations elsewhere, is that we could do with a greater diversity of players, particularly in the mature fields.

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