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Interview

with Torstein Sanness, Managing Director, Lundin Norway

01.10.2012 / Energyboardroom

The Johan Sverdrup discovery – formerly Aldous/Avaldsnes – was made in a 40-year old production province, close to existing infrastructure. Was this just a piece of remarkable good luck or was there something you had spotted in your E&P strategy?

I think it was a combination of both. Firstly when Lundin entered Norway in 2003 we put together a very focused strategy for organic growth. We sought to define new exploration models and we placed our belief in the prospects which came out of these models. Our strategy was oriented around inverted Jurassic Highs and the Utsira High was one of these.

Lundin’s E&P strategy has been extremely successful and has produced a major discovery every three years since 2004 with the Alvheim Volund discoveries. In 2004 Lundin applied for a license which resulted in the Luno (since renamed: Edvard Greig) discovery in 2007 for which Lundin is the operator. Then of course we have 2010’s discovery of the Avaldsnes.

Lundin was exploring around the Utsira High, putting the acreages together. I believe Lundin was one of the first companies to realize that there might be some oil and gas migration into the eastern part of the old high. It was this realization which resulted in us making the Avaldsnes discovery as the operator of PL501. Statoil, who was the operator on PL265 then drilled their Aldous discovery a year later resulting in what has become the Johan Sverdrup discovery.

Both Statoil and Lundin have since then been engaged in appraisal drilling which so far has been very successful. Every time we drill a successful well it confirms the magnitude of this discovery. We are both now moving our rigs to drill more appraisal wells and it is fair to say that in the next two years, Lundin will start to drill the other side of the old high on the south west side, where Lundin is the operator with sizeable working interest. We believe that all you need in this region for another discovery is reservoir quality rocks above the ground area OWC. Indeed, there may be more discoveries to come – these are exciting times. Statoil now estimate that first oil from Johan Sverdrup will be in 2018.

As for the element of luck, the prospect has been laying there for the past 45 years and I sometimes wonder: What if nobody had gone after it and had the guts to drill it? It certainly feels like there was an element of luck in making this discovery. However everyone forgets that we spent USD 600 million in this area before it became a big success story.

What does a discovery like this represent for Lundin’s further growth in Norway?

The discovery has opened several doors for the company. In the past, the license papers stated that since Lundin was very small we needed to find partners for drilling. Other companies were a little reluctant to partner with us in the beginning but since the Avaldsnes discovery we have not been short of companies queuing up to join us.

In terms of finances, traditionally Lundin has borrowed money from the parent company to pay for our capex. Lundin pursues an organic growth model and our Norwegian income from last year was roughly USD 1 billion so we have been largely funding ourselves. Nonetheless, when it comes to paying 50 percent of the Edvard Grieg platform, with the whole development likely to approach NOK 24 billion (USD 4.18 billion), we need the support of the parent company. For this expenditure the parent has borrowed USD 2.5 billion which is actually 1 billion more than we need. The loan was oversubscribed to the tune of nearly USD 5 billion so Lundin’s E&P success in Norway means that there is no problem in finding financing for our continued development.

From a production standpoint, our oil production has been increasing steadily and by 2015 we are looking to have doubled present production. However, when Johan Sverdrup comes on-stream in 2018 or later we will see our production increase substantially again. Statoil have been quoted as seeking 500,000 pd from Johan Sverdrup after 2.5 years of production. Lundin can look at having around 25 percent of Johan Sverdrup’s production and we are the second largest owner of the field.

It is also not just a good discovery in terms of quantity but the value per barrel produced. Johan Sverdrup will produce very valuable barrels because the water depth is just 107-115m, there is an oil pipeline at Grace field and a gas pipeline either to the UK or to Sleipner so the infrastructure is already there. Johan Sverdrup does not have any excessive pressure, temperature, CO2, H2S, deepwater issues. This is the type of discovery that practically comes ready packaged.

The significance and the timing of this discovery has also ensured Lundin a good position in gaining access to leading rig contractors. The jacket is being built by Kvaerner outside of Trondheim – the best jacket builder in Europe, in our opinion. The topside is being built by Kvaerner and Aker Solutions so around NOK10 billion is already going back to the Norwegian industry. The Norwegian industry know the terms and regulations very well and can be trusted to deliver on time. Lundin is fortunate to have these partners.

What is your perspective on the high service costs in Norway?

Norway is a high cost environment which is not great but it is certainly not a show stopper. If contractors deliver on time and with the right quality with no question marks over HSE requirements. In my mind Norwegian contractors are often worth their extra costs. Of course, you might save 10-15 percent by opting for a cheaper manufacturer or service company overseas but you will likely encounter costly problems pertaining to Norwegian regulations which later erode the economics of your project.

The main problem which is causing anxiety among E&P companies in Norway is actually the capacity of the supplier industry. All the Norwegian yards are now working overtime to meet orders and Lundin was lucky in securing contracts for our work before the supplier market reached capacity. Supplier companies need to ramp up their capacity as currently they are unable to take any more orders.

72 licenses are up for grabs in the Eastern Barents Sea under the 22nd Licensing round. How does Lundin view Northern E&P?

Looking at our acreage situation, our core areas are around Johan Sverdrup, Edvard Grieg and Alvheim Volund. We are also drilling a new area – an old inverted Jurassic High called the Albert area – we are hoping for something there in a few weeks. There are plenty of opportunities for Lundin.

However, Lundin made the Skalle discovery last year and we are extending the acreage up to the Havis and Skrugard discoveries. Lundin is a partner with ENI in this region. We are taking our own rig up to the Barents Sea and opening an office in Harstad. Lundin will apply in the rounds up there just as aggressively as we have done in the past. There is certainly no slacking because we have had some success in the South.
Lundin is in constant change. In 2004 we were eight guys, one lady and a dog, today we have more than 200 working for the company. I expect Lundin will need 100 more people to join in the next years. Lundin is a good moving company to join and this particular shop is going to be there tomorrow.

This growth will affect the culture of the company. However if you are able to change quick enough you can maintain the culture, and the creative minds do not want to be boxed up in a big company culture.

We are developing our project structures and adopting the old Norsk Hydro project culture given that we hired quite a few of the employees who did not join Statoil after the merger in 2007. There is also the Saga exploration regime present in Lundin and we need to persuade these two groups to integrate. Most of the seniors in Lundin already know both cultures extremely well.

Last year was a year of transformation for Lundin, what does 2012 represent for Lundin?

2012 will be the final proof that Johan Sverdrup is as large as we hoped. This will become apparent over the next five wells drilled over the next six months. The other major milestone this year was gaining approval for the PDO at Edvard Grieg. This is an achievement in itself that a small company like Lundin can be accepted by the Ministry, Stortinget, NPD. Once the projects we have now are all on stream Lundin will be a totally fledged E&P company in Norway and can take on anyone.

On a personal note, how does it feel working for a Swedish E&P company as a Norwegian?

Actually we like to joke that this is a Swedish company run by Norwegians. The parent company is actually in Geneva and there are few Swedes here and there.

You may have heard that the Swedes were historically asked to take half the Norwegian blocks around Oseberg, but the shareholders of Volvo said no and the door was then shut. The train went by for the Swedish E&P industry and it has led to a reversal of fortunes. Sweden in 1945 was the rich cousin in Scandinavia with twice the size and number of people. Over the last few decades, it is Norway that has started to look like the rich and successful cousin.

What would be your one piece of advice for a junior executive starting out in this industry in Norway?

Make up your goal and strategy for getting there and do it! Even if others tell you that your goals are impossible, do it. If we had given up every time someone told us we would not achieve what we wanted – which happened a lot of times since 2004 – we would not have had this success. So press on ahead!

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