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Interview

with Richard D. Paterson, Market Managing Partner, PricewaterhouseCoopers AS (NORWAY)

17.09.2009 / Energyboardroom

When we interviewed the Minister of Finance, Mrs. Halvorsen, she was highlighting that many countries did not use carefully the resources coming from oil, but that the Norwegian government made some budget rules to make sure that this wealth is being used by the future generations. Being advisors in the energy industry, how do you think the government can use the available resources more wisely?

Richard Paterson: Natural resources can provide a significant source of revenue, or “wealth” for countries. Most of these resources take a long time to develop and exploit, so long term planning is appropriate when deciding how to develop and use these resources to maximize the benefit. In frontier locations, for example in Africa, the Middle East, or wherever a large reserve base is discovered, the government plays a key role in the decisions about who the players should be, and how the proceeds should be utilized to benefit their country. It is crucial to know the quantity and quality of reserves involved, their value, the timeline for development, etc. Then you must establish the social and financial objectives of this plan. There is no silver bullet to answer this question but a good plan and a good financial base will definitely make a difference. In the government sector the aim is to serve the people, whereas the commercial sector serves its own stakeholders, – so good planning is a key to utilization of the resources.

During our interview with AGR Group, Mr. Skogen highlighted that it is important to plan ahead, and take into account the next generation. Nevertheless many operators want to drill more and get as much out as they can now. How do you assess these differences between short term need and long term objectives internationally?

Richard Paterson: There is indeed a tension between the long term and short term. Looking back, there have been examples where the goal was to exploit the resources rapidly, which is clearly a short term perspective. To maintain the viability of wells over the long term, proper techniques must be employed. Failure to use the proper techniques will compromise production, reducing the long term value of projects. There are different models that have been used by governments over time, and some have worked better than others. Countries who tried to exploit their resources quickly have been less successful than those who have invited experienced producers to come in and co-develop the resources. There can still be conflicting objectives that can cause tension; companies with licenses to produce seek to meet financial objectives for their shareholders, while the local government has financial objectives for its people. The goal is to achieve a balance between both interests. In most cases today, we see the industry and the governments taking a longer term approach to developing their resources.

In an article entitled, “Thriving Norway Provides Economic Lessons”, it was explained that Norway was doing quite well in times of economic slowdown. With today’s price of $75/barrel of oil, could you assess the country’s economic performance compared to other oil based economies?

Richard Paterson: Oil based economies have experienced tremendous fluctuations over the last two years. It was only a little more than a year ago that crude oil prices were topping $140/barrel, but within six short months, the price fell over $100/barrel. Given the cyclical nature of the industry, many countries have developed strategies to try to offset the boom to bust cycles. Russia has what is called the “economic stabilization fund”. When prices are high, the government does not use all the revenues from this high price environment, but saves a part of it. This effort helps to keep the whole system from imploding. Before this latest financial crisis, the country had built up quite a reserve fund over time.

Gunnar Slettebø: In Norway the same system exists, and is called the oil fund.

During our interview with Jens Ulltveit-Moe, he mentioned that he withdrew all his investments from the oil & gas industry since to be successful he would have to go international, and one cannot be internationally present without having to deal with corruption. In PwC’s experience, how is the oil & gas industry facing the problem of corruption and what are Norwegian companies doing to counter this issue?

Richard Paterson: Obviously there are always exceptions to the rule, but in general the overall international oil company community is very focused towards having the right business practices, controls and procedures in place. The oil and gas community wants to make sure that business is done in the proper way. People are human beings and sometimes they don’t follow the procedures, but setting the tone at the top, putting controls and procedures in place, and ensuring that these processes are followed are all very important. We were listening to a speaker from StatoilHydro who was emphasizing that the oil and gas industry operates in some challenging environments and developing economies. Corruption certainly is one of the factors that have to be taken into account. In the oil and gas business, corruption exists in some parts of the world, and must be dealt with. But “to deal with it” doesn’t mean acquiesce to it. There are proper business practices and there are ways to get things done without compromising integrity. The proper way tends to make things slower and more bureaucratic, and people sometimes are waiting with their hands out but don’t get them filled. These are challenges in some of the business environments of the oil and gas industry. Overall, the industry is focused in doing it the right way.

Gunnar Slettebø: We work with a number of companies in PwC Norway, either subsidiaries of multinational companies or companies headquartered in Norway with subsidiaries outside. They are all focused on doing the right thing and anti-corruption procedures are very high on their list.

Talking about doing the right thing, many companies feel that they should “go green” not only by changing the way they produce, but also by changing focus. Sir George Porter said “I have no doubt that we will be successful in harnessing the sun’s energy… If sunbeams were weapons of war, we would have had solar energy centuries ago.” As an energy expert, how do you think the environment in which we live influences the pace at which technological innovations are made in the energy field?

Richard Paterson: Oil and gas companies clearly care about the environment, and spend large sums of money on research and development to improve efficiencies and protect the environment. Some oil and gas companies are investing in solar, wind and other alternative energy sources, and others are pursuing alternative fuels or ways to reduce greenhouse gas emissions. There are a lot of thoughts about the business models and the value proposition to the shareholder, and which direction to take. For most oil and gas companies, there is a need to earn a return on investment. So investing in new energy sources has to produce results within an acceptable time frame. Using solar energy as a simple example: what is the customer willing to pay for energy? If a solar power producer cannot sell energy at the price it costs to develop it, maybe solar isn’t the right business model for the short run. Private enterprise is in the business of serving shareholders and the decision to invest into something that may not be profitable is probably not the right business plan. Solar is only one among many other technologies that can produce energy. It is neither currently cost effective by itself nor able to be used by itself. Today if we take a solar field in California for example, or someplace where the sun shines a lot, you not only need a way to collect the solar energy, but you have to have some way to transmit the power. The transmission grid also needs to have constant level of power in order to use solar energy, so there also has to be a gas plant, coal plant or a nuclear plant, as a backup. All of these factors drive the cost of solar energy beyond the cost that most people are willing to pay.

Technology helps drive changes and clearly we are making progress in a variety of alternative energy sources. One promising solar-related project is the DESERTEC foundation’s proposal to harness the energy of the deserts in the Middle East and Africa. The energy industry produces much of this innovation and they should be applauded and not criticized for not making use of it when it is not commercially viable.

You brought up the DESERTEC foundation and one of its objectives was the security of energy, since obviously it is a big debate. How do you see future of energy security?

Richard Paterson: Energy security is a complex issue, but is on the minds of government leaders around the world, as well as oil and gas companies. There are two sides to the energy security topic – security of demand and security of supply. For example, Russia has a lot of gas; Europe has a large need for gas. From a European point of view, there is a need for more security of supply and free flow of gas from whatever source to avoid waking up one day to no gas. On the other side of the table, Russia is looking at the security of demand, and wants to avoid putting all its eggs in the same basket. They start looking at China for example instead of building all of the pipelines to Europe. Both parties have legitimate issues. Europeans want to always have power, and Russians see that their revenue is dependent on the gas and need to diversify their customer base to avoid losing all revenues if the Europeans decide to get their gas from some other place (Libya, Turkey etc). Sometimes the security of supply gets more press than the demand side since it is a more western concern, but both are legitimate issues. Ultimately, everyone everywhere needs energy to heat and cool their homes, to cook, for transportation, etc. The ability of governments to work with energy companies to explore for and produce hydrocarbons and other sources will largely dictate the outcome for how secure the world’s energy supply will be.

Mr. Deertz in PwC Indonesia emphasized that one of the forces of PwC is that it has dedicated experts to the oil & gas industry. How competitive is PwC in the oil & gas business and in Norway?

Richard Paterson: PwC is a leader in the oil and gas industry around the world. We have been serving companies in this industry for more than 100 years.

Clearly energy is a very technical and global business. From our perspective, our people have to be industry dedicated and be located wherever our clients are. We are in about 200 countries because our clients are in about 200 countries. Our clients see this as our advantage – we are ready to serve them wherever they do business and understand their issues and their needs. We do not bring a solution we used in a bank the week before, but one that we have developed in another oil and gas business somewhere else. We have solutions that are relevant to their business. We come as experts and deal as peers to understand their business. It is either a critical success factor or a competitive advantage. I would argue that if you don’t have an understanding of the industry, you cannot work effectively in this market. In Norway we have strong expertise in this market.

Gunnar Slettebø: We have a very strong client portfolio, including companies we audit and those we provide with non-audit services, such as tax and consulting. We invest a lot in our business to train our people and have a strong network among the specialists in our firm. We have strong bonds with all the other branches of PwC around the world. We have a broad competence base across the different services we offer. Obviously it is impossible to have specialists in all areas in one location, but that’s where we use our global network and use competencies from outside Norway. We are internationally focused and if there is a need, we call other specialists to come and assist us.

Richard Paterson: That’s where I come into play. I make sure that if the client has a need, but the local PwC team has no exact match, then we can get someone from another office so that the client can get the exact solution needed. That is what makes our network across the world very valuable. We are connected. For example it is my 3rd time in Stavanger this year.

Ole Martinsen: Compared with other firms, PwC has a very active network. Especially in such a small country as Norway it is important to have a strong network to support us. In Norway our firm is large and we work across all of the lines of services – from tax and legal, advisory and audit. In advisory and other non-audit services, PwC serves clients who use other firms as auditors in a connected way. PwC manages to do this in a way that I haven’t seen from other firms yet.

Richard Paterson: A key example of how our network has evolved is through our secondment program. I have lived in Russia and Houston during my career with PwC. As a result, I have colleagues I know and trust in both places, and I stay networked with them year after year. It’s expensive to relocate partners to other parts of the world, but it is an important part of the education process and people development focus that our firm practices. Ultimately if one has lived in another country, it is easier to pick up the phone and call someone you know, than look in the global address book and call a stranger.

Gunnar Slettebø: Indeed it is much easier. In addition we attend several meetings and regular networking calls to share ideas. Having lived and worked in another country, advisors know who the specialists are and do not have to look in a list of consultants the size of a bible.

In 2004 the government’s decision to amend taxation laws regarding the reimbursement of exploration costs saw an influx of smaller companies. How did this impact PwC’s strategy especially in terms of offer to these newcomers?

Gunnar Slettebø: When some of these newcomers came to Norway they needed our services, and wanted to understand the new tax rules. The most common question was “is it true that one gets a cash tax refund?” We explained to them that yes it was, though certain qualifications and criteria had to be met. But they need to understand the whole picture including the rules, how to set up the new business, the competences needed, where to find the people, the kind of internal controls and processes that are needed etc. PwC assisted them with these criteria. For a company to make a qualified investment there has to be an understanding of the impact of the cash rules and we can help in that.

Richard Paterson: Usually when a corporation enters a country for the first time, the typical first step is to understand what the tax rules are and how they apply. They want to know what the rules say and how they really work, which is where PwC tax specialists are useful to them.

Norway is part of PwC’s international network, though it has a unique socio-economic model. How do you manage to reconcile the hard working requirements of PwC with the typical 8:30am-3:30pm Norwegian work rule?

Gunnar Slettebø & Ole Martinsen: We don’t know that rule; haven’t heard of it.

Richard Paterson: Being in the services business, the client is the one you serve. If you are there when the client wants you to be there, you are going to do well. Our firm operates around the world, and our people reflect that diversity. We respect a work/life balance, but we also make sure that our clients get the help they need and expect. Our people understand this, and they work smart and work hard. We also invest heavily in technology, to make it easier for our people to stay connected and work from almost anywhere – from the office, home, the client’s site or the airport.

In the short term, where do you want to bring PwC Norway?

Ole Martinsen: Looking at the firms PwC competes with in Norway, we have a leading position in terms of size and revenue and we will continue to grow our business. There aren’t that many firms in Norway. For audit services there are only 4 firms; in advisory there aren’t that many either. In Norway there are few very big players/clients and we have to make a difference for them, and if we are capable of that, we can grow. We expect to continue doing that. Over the past few years we have used the global network even more to demonstrate to our clients that we are a global firm capable of serving a big client. We will continue to leverage this network in the future.

Gunnar Slettebø: We will continue to invest in our people as an engine for our growth.

Richard Paterson: PwC has an interesting business model, because the company doesn’t grow by assets. PwC doesn’t build big facilities, or drill for oil. The company’s resources are all human resources and development is linked to training programs. In this model, investment has to be constant, and spending in people development has to be important. By people development I mean acquisition through recruiting, then training, and obviously people retention.

Gunnar Slettebø: And it goes both ways. We have people going abroad but also coming from other countries. We train them…. to enhance our corporation.

What would be your dream project in Norway?

Richard Paterson: The dream project adapts to the economic times. A year ago, client needs were much more focused on acquisitions and growth. Then, all of a sudden, the focus switched to cost control, and refining the business model. With oil prices at $140/barrel as they were last year, going down to $35/barrel, it is a cyclical business and projects are adapting to these cycles. From an advisory stand point, there was a move from an M&A and transaction services mindset to a process improvement, cost control mindset. The problem is that our people are largely specialists and not generalists, which means that last year our transaction experts were well underutilized. Obviously we don’t let them go because of a short-term downturn in business. Today we’re hoping that the M&A activities will soon pick back up, so we have to maintain our transaction services capabilities and be ready for the turnaround. Should PwC focus on what its dream project would be, the company would not be successful in achieving it. On the other hand by focusing on its client’s dream project, PwC will reach its goals.

What is your final message to Oil & Gas Financial Journal readers?

Richard Paterson: On a global basis, we are extremely proud of the clients we do business with. We are a preeminent firm in this sector and we serve clients of the same caliber. Our clients range from large IOCs to NOCs, some of which we audit, and others we serve as advisors and consultants. We believe strongly in the oil and gas sector and it is an industry where we will continue to invest.

The whole is the sum of the parts. If we all have the same aspirations we will do well.

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