Torstein Sanness, Managing Director, Lundin Norway
As one of the two largest explorers on the NCS, the managing director of Lundin Norway, a Swedish E&P player, talks about developments regarding the Johan Sverdrup field and the companies capital expenditure on the NCS.
When we met you last year you stated that 2012 would be the final proof that Johan Sverdrup is as large as you hoped. This would become apparent over the next five wells drilled over the next six months. One year later where do we stand?
We are still within the ban that we set two years ago. A total of 15 wells have now been drilled on the Johan Sverdrup field. During the first quarter of 2013 two wells and one side track were completed and one additional appraisal well has commenced drilling. We will probably need to drill another two or three additional wells within the license area PL501 were Lundin Norway is the operator with a 40 percent interest.
All parties in license areas PL501 and PL265 (Statoil is operator) have agreed a timetable for the Johan Sverdrup field with development concept selection to be made by the fourth quarter of 2013, a plan of development is scheduled to be submitted by the fourth quarter of 2014. The current forecast remains for Johan Sverdrup first oil by the end of 2018 with full production in 2019 or 2020.
Currently we are looking to set the data as good as possible before making a decision on field development. That being said, the reserve figure will to such an extent that a minor change in the recovery factor could have a significant impact as we are looking at half a million barrels a day.
2013 has begun with positive news: Lundin has been awarded seven exploration license interests in the 2012 Norwegian Licensing Round. Can you elaborate on the key targets and expected results?
It is fair to say that we are happy with the result of the 2012 licensing round. In fact since we started our operations in 2004, Lundin Norway has been content with all licenses we have participated in.
In 2013, Statoil will drill 25 appraisal and explorations wells and we will drill 18. That being said, Statoil and Lundin are definitely the two largest explorers on the NCS. Moreover we have the third largest – after Statoil and ConocoPhillips – capital expenditure budget on the NCS. Substantially all of the 2013 budgeted development expenditure relates to ongoing development projects in Norway. Half of our budget is allocated for capital expenditure for the Johan Sverdrup, Edvard Grieg and Luno fields and the other half for exploration and appraisal wells. Full speed ahead!
Do you still consider Lundin Norway to be a junior?
Naturally we are a young company as we started in 2004. However the average age of our employees is 51 years. Our crew has the experience and that is way we have been able to grow significantly over a relatively short period of time. It is the experience of our people that counts.
To prepare itself for activity in the Barents Sea Lundin has taken its own rig up North and opened an office in Harstad. In June Lundin has won one license during the 22nd licensing round in the South Eastern Barents Sea. Is the outcome in line with your expectations?
Frankly we are not happy with getting merely one block. If we are going to sustain the amount of drilling we require more than one license when applying for a licensing round.
Therefore we definitely take up the opportunity to discuss the outcome with the Norwegian Petroleum Directorate and the Ministry of Petroleum & Energy. In line with our discussions we conduct with aforementioned parties we will prepare ourselves for the upcoming licensing round.
As discussed Lundin has won 7 licenses in mature areas while being one licence awarded in the Barents Sea where the potential for petroleum is less explored and where fewer infrastructures are built. What does this mean in terms of investment and technology?
We have put together a good acreage block before the discovery of oil in the Barents Sea at Skrugard and Havis, now renamed Johan Castberg. Lundin has a significant part of the neighbouring acreage towards the East of those discoveries. That area will be drilled over the next coming years. Our aim is to drill two wells annually as an operator in the Barents Sea. In 2013 we will drill two exploration wells on the Gohta and Langlitinden prospects.
In fact the drilling of one exploration well has commenced in July. The well will target the Gohta prospect, which is located some 150 km northwest of the Norwegian coast and 65 km south of the Johan Castberg discovery. The well will be drilled using the drilling rig Transocean Arctic.
One of your partners up North will be a newcomer: Lukoil. What are your expectations working with a Russian partner?
Lukoil will bring its knowledge and expertise that they have gained working in the oil-rich Timon Pechora—a Basin Province of Northwest Arctic Russia.
In return we will share our knowledge and expertise we gained in the Barents Sea. Naturally it is not Lukoil that has the leading Russian edge in that area, it is Rosneft. But I have good faith that Lukoil will put good people to work with ours and we will get them up to speed real quick.
It will be a quite interesting cooperation and we are certainly looking forward to it.
What further synergies do you foresee with Russia?
In the Lagansky Block in the northern Caspian a major oil discovery was made on the Morskaya discovery in 2008 by Lundin—Lukoil is our next door neighbour in the Caspian Sea. It is therefore fair to say that working with them in the Barents Sea is more than an accident.
When we met Eivind Reiten earlier, he mentioned that rapidly increasing costs associated with drilling could, despite recent new discoveries, have significant and negative consequences for the industry as a whole. To what extent is this affecting your commercial strategy in Norway?
We would all agree that drilling costs in Norway are high. It is not only the day rates charged by the owners but also the third party extra costs.
However, if you plan the wells properly and do not use excessive number of days to drill a well the high costs are not a showstopper. What would kill you as a company is taking 60 days over an activity that could be completed within 35 days.
Fact of the matter is that high drilling costs in Norway are under discussion for the last 40 years. But what has come out of this? Ten years ago wells were actually drilled quicker than today. Is this because of different HSE regulation, that we are not planning properly or is it the regulations on working hours for offshore personnel—the 2/4 (2 weeks on, 4 weeks off) arrangement for offshore workers. It seems that no one is capable of providing answers.
At Lundin our aim for drilling a well is to find hydrocarbons. And in order to find hydrocarbons in areas where others are unable to find them you need to have data, which is expensive. By acquiring data you use more rig days. That being said, like any other party we spent a fair amount of money drilling and acquiring data from exploration wells. But if you find a billion barrels that can pay for quite a bit of rig time.
Looking back our strategy has been extremely successful and has produced a major discovery every three years since the Alvheim Volund discoveries in 2004. The Luno (since renamed: Edvard Greig) discovery in 2007 and then the 2010 discovery of the Avaldsnes (since renamed: Johan Sverdrup). Now that we are three years later we need to find something again. We already discovered Luno II, which could give up as much as 160 million barrels of oil and are in the process of drilling five new wells. I imagine that at least one of them will be another discovery.
Having such a track record as Lundin, high drillings costs are certainly not a showstopper.
With Norway transitioning from a mature province to a fast-track new developments country. Do you worry about any slackening off from this drive to maximize recovery rates?
At first politicians wanted the industry to find incremental reserves while there is still infrastructure. However with the proposed tax changes that have been proposed by the government earlier this year it is exactly those very reserves that are punished.
The tax changes will reduce the uplift in the petroleum tax system from 7.5 per cent to 5.5 per cent. This will reduce the attractiveness of future projects, particularly marginal fields. Statoil already announced that it raises questions regarding the predictability and stability of the fiscal framework for long-term investments on the Norwegian continental shelf. It is unfortunate that politicians have not organized a hearing round for the industry in order to discuss the proposed tax changes.
For Lundin this will not have that big of an impact as marginal fields are not our prime focus. We are looking for greenfields and are not a brownfield operator.
In addition to Norway, Lundin operates in France, Ireland, Netherlands, Russia, Congo, Tunisia, Indonesia, Malaysia, and Vietnam. The end of July Lundin took new acreage in Indonesia. How would you describe Norway’s future contribution to the company’s revenue stream and performance?
I believe that the next Lundin affiliate to show significant progress will be the Malaysian one. They are currently around four/five years behind us.
In Norway we changed drastically because we are roughly at 25,000 barrels per day, which will double once the Johan Grieg field will commence. When the Johan Sverdrup field starts producing it will change our company completely. By that time we will be 400 employees but that is close to nothing compared to our reserves and cash flow. By then we will probably produce 150,000 barrels per day.
Historically Lundin Petroleum’s share has been very strong. The company started in 2001 with a share price of 3 Swedish Kroners while yesterday the price was around 143 Swedish Kroners. In addition we had a spin-off in the UK worth 800 million USD. As a result you can imagine that the annual shareholder meeting is filled with happy faces.
Do you believe that in terms of size Lundin will be the next IKEA?
There are only two similarities between the founders of Lundin and IKEA: both moved from Sweden to Switzerland.
Ingvar Kamprad, the founder of IKEA, is an extremely focused person. I believe in defining your goals and sticking to them.
Lundin has its operations on the NCS, however its HQ is based in Oslo. In your opinion, what role does Oslo play in the Norwegian Oil and Gas industry?
Lundin has made the decision to stay in Oslo and not to divide the company. There is ample competence in Oslo. People have been on the train back and forth and finally there was a company that moved to Oslo. In fact, Statoil has quite a few people in Oslo too. But again, that we remained in Oslo was something new.
We have been lucky being able to attract the right people. Actually in Oslo we take advantage of a wider screen of people. We have seen quite a few companies wanting to participate on the NCS subsequently setting up their tents in Stavanger. As a result these companies are facing challenges as people are staying two years and leave. For that reason players are moving from Stavanger to Oslo. Naturally if you change out your crew every two years there is no continuity, it is expensive and unable to establish a company culture.
To read more articles and interviews from Norway, and to download the latest free report on the country, click here.