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Interview

with Torsten Sanness, Managing Director, Lundin Petroleum

14.05.2009 / Energyboardroom

Yesterday was Lundin’s AGM, and the message assessing the global industry was pretty dour – declining reserves, few giant fields left to be found, and a large majority of production coming from a small minority. However, turning towards Lundin’s performance, we’ve seen a 350% reserves increase over the last seven years, with this figure up 26% in the last year alone, when Norway came onstream with Alvheim, the single biggest producing core of the company. What is your assessment from a Norwegian perspective?

Lundin came to Norway five years ago, with just a small production and a huge capex to develop Alvheim. Now, Alvheim is on production, and Volund will come on production in 2010. Right now, Norway accounts for approximately 40% of the company’s production by volume, but the major factor is that Alvheim is produced between $4-5 per barrel, a very comfortable opex, and an expected range for Volund of $6-7 per bbl, even in today’s market. Over the last five years, Lundin has put together quite a nice portfolio as an operator, and was voted the best exploration company by the NPD and others for 2008, because of the Luno discovery. Lundin has been able to define new exploration plays in old areas sitting close to existing infrastructure, which is the direction exploration has taken in the province. Four or five years ago, Norway decided that if the country were going to find all the additional resources close to existing working infrastructure, they needed some more players, because the big players didn’t have the materiality, and were focused with other attractive prospects elsewhere in the world. So Norway brought in many new players, of which Lundin was one, and now the company has grown up to being a drilling operator, finding meaningful reserves, in addition to drilling exploration wells, appraisal wells, and being a very active applicant in all the new rounds, both APA rounds and the 20th round. Nearly all of what Lundin has been awarded pretty much up to now has been successful, and this has proved the government’s policy was right: we’re finding additional reserves, and of course in Norway in the end, 70% of what is found goes to the common citizen through the sovereign fund, which during the present so-called financial crisis is very nice to have.

It’s very imperative that the change in policy is showing results. Companies are rewarded for submitting applications that are technically on par with the majors, and demonstrate the competence and capacity to drill exploration wells. Now, Lundin is moving forward with sizable operator interest into what we call the DG2 and DG3, meaning that there is a commercial discovery ready to evolve into a field development plan, which will be built and then produced from. From its infancy five years ago with nine people in a small fourth floor office, obtaining small – although good – interests here and there, Lundin has totally changed into 60 people and the building’s biggest tenant, with substantial growth now and over the next 2-3years to facilitate being a field operator.

Luckily, Lundin has been able to find reserves that we are able to produce at $4-7 per barrel. People thought a few years ago we were chasing good management teams, and were old-fashioned in wanting to build a company based on sustainable cashflow. Today, that strategy is really paying off, because now we have money and there are many others who don’t. This gives us a flexibility to do certain things – because it’s not all that much fun to have money when everybody else has money; then you can’t afford to do anything because prices are proportionately higher. There is a kind of nice wrinkle to it, and Lundin is trying to capitalize on it, as a small yet vibrant and aggressive company.

Speaking of aggressive, I have a quote from you dating back to 2004 saying that Lundin was in a hurry to “make someone an offer they can’t refuse”.

Yes, I remember that one well! I was in Stavanger on the soapbox while everyone was saying that no, Lundin will never succeed, how will they get acreage and get off the ground, etc. Finally, I became a little impatient and said the quote you mention. Today, Lundin has 19 operatorships and exactly the portfolio we wanted to take. However, we’re selective; it’s not a matter of building up a huge portfolio without the resources or the people to work. It’s a focus where Lundin knows it will have the best gang working and enough capital to be the leaders in that focused area, because we realize it doesn’t make a difference how many acres you have, but their quality. Where Lundin has concentrated is in having 3D seismic, and the latest and greatest in technology, with a toolbox as advanced as StatoilHydro’s. In fact, since StatoilHydro joined Lundin on Luno, it has been a kind of quality check affirming that yes, Lundin has that toolbox and knows as well as anybody else how to use that toolbox technically, in addition to understanding the economics reasonably well too. Of course, with StatoilHydro as a strategic partner in that particular area it’s somewhat of an odd couple, with a huge monster of a company next to 60 people in Lysaker, with the latter group driving the show in that particular area.

How is it that a company from Sweden can enter and in only a few years become the best exploration company in the NCS, outshining a far bigger company with decades of local experience?

You see, most of Lundin’s people have a past in the big companies, so they are way up on the learning curve, with a collective competence that means we’re probably more efficient than a big company. We’re so close that operating, communicating, and making decisions works totally differently. Of course, a larger company is able to do some things because they’re so big, that we couldn’t hope to duplicate. However, the coupling is complementary, in that we need what they do, and they need what we do. In the case of Luno, both parties understood the synergy in this little area between us, and that’s why we made a deal. We did not put out a huge auction to make the most money, because we are not cash-strapped. We wanted to have the ultimate partnership in that area, and I think we achieved that.

Why, not just for StatoilHydro but for other companies, is Lundin the partner of choice?

Lundin is a partner with a track record, and a company that has an established exploration track record. Also, we’ve shown everybody that we can grow sensibly and put on the necessary competence as we go along, because we have had absolutely no problem in attracting the best people. Why? The operator projects we have look interesting to everybody, and are of the size usually reserved for a major company’s project, like Luno. Over the next 18 months, Lundin will drill three wells to show whether it’s 100, 200, 300, or 400 million barrels, and of course that’s why the big company couldn’t just let us loose and had to get in on it! Lundin’s attractiveness if the allure of that potential, and the perception is that we’re a company looking for more potential, and have the capital ready to look for new play concepts and back them. We’re not afraid of taking a license 100% and committing to a well if we believe in it, because we recognize we usually have no problem finding someone to join us.

You mention you haven’t had a hard time attracting the best and brightest due to the operator status, but of course once you attract them in there’s the question of keeping them here and stimulated. How would you define your personal management style and philosophy?

At Lundin, we’re all in the same rowboat together, and are very close-knit; it’s pretty much the same technical team that has worked together for the last nine years, where we have lost only one employee. When times were really good one to two years ago, we didn’t have the problem widespread in the industry of retaining our people, because it’s a close-knit group and we’re choosy in picking it. Lundin would rather spend time on who’s going to come, because it’s not part of the philosophy of the leadership here to find out two years after the fact that an individual doesn’t fit in – that takes time away from the value creation process, which is the number one priority. Lundin is not very bureaucratic, preferring an open door policy, exemplified every Monday at 9AM, where we spend an hour talking about all our activities on a high level. In that hour, everybody in the company gets up to the same speed on everything. To me, these meetings symbolize that everyone has to buy in and we’re all in this together. If you empower people, it’s a big responsibility, but I feel that people would rather like to know than read about their own company in the newspapers.

As an international manager with a long history of experience, what would be your best lesson to empower people?

Have people make decisions and learn from them – the only way to learn is to take responsibility. If you’re willing to take five decisions, one may be wrong, and that’s OK, but you have to learn from the one you made wrong. And after the fact, if someone wants to ask about them, my door is open from 7AM until I go home.

You refer to some substantial growth ambitions. Where do you want to bring Lundin in Norway over the next five to 10 years?

If Lundin can put Luno and Nemo on production as operator, the company will, with a little bit of luck, produce 100,000 bpd and be a totally different company numbering around 200 employees. As Lundin grows, the concept of the network company will become increasingly important. As soon as we put a project team together, we assemble a team of consultants, at any given time around 10-15 working with us here alongside another similarly sized group in Stavanger. I was the fourth employee at Saga, and saw it expand to nearly 1,500 over a 20-year time frame. It was good for me because I didn’t have to change companies – instead, the company changed around me. I learned that this time, we’re going to do things differently, because there are so many more opportunities as a network company. 20 years ago, it was only the major companies that had the toolbox, and today that has totally changed, and that’s why Lundin is in business, because we have the same access to the same tools as the big companies. It’s a change for the better, because it means competition is open. I’m a firm believer that competition, if done right, is a good thing.

Overall, Lundin is reasonably happy with the situation. When we apply in the different rounds we are awarded what we apply for. I think we have demonstrated to the community, meaning the authorities including PSA and NPD, that we have been able to grow the company in a sensible way, putting all the correct systems in place. Lundin is a small E&P company on a fairly rapid growth curve, and we’ve been able to show that yes, you can create a sustainable business by going after quality, and can mitigate the risk by doing so.

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