with Geir Lunde, Managing Director, Concedo ASA
Concedo was a relatively young player on the NCS when we met you last time. How do you see your development since then?
Since we last met, Concedo has kept to the plan and followed the strategy as defined back in 2006, concentrating on exploration in Norway and selling these discoveries prior to field development. This has allowed the company to build a very strong financial position; at the end of 2011, we had a cash reserve of NOK 600 million (USD 105 million). We were therefore in the position to pay a dividend to our shareholders and dedicate NOK 400 million (USD 70 million) to further exploration. This means that we have working capital available for more than five years of exploration or more than 10 wells.
We maintain our ambition to participate in one to three wells per year, but remain cautious in our exploration strategy. Concedo now has a portfolio of nine licenses on the Norwegian Continental Shelf (NCS) which is not that large, we do not want to be an operator and we do not want to be listed which means we can keep a small technically focused staff concentrating on exploration. This remains our plan for the future, pursuing the opportunities in the licenses we have obtained and pursue new licenses either through concession rounds or farm-in trades with other companies.
Concedo now has two large licenses in the Barents Sea located just west of the Skrugard and Havis discoveries. The first is PL531 operated by Repsol and will be drilled next year, sometime around February. Our other block, license PL607, is just north of PL531 and operated by GDFSuez. PL607 could be drilled late in 2013, but more likely in early 2014. In that license we have two good independent drilling targets which may require two wells to be drilled. Concedo has significant shares in both licenses: 20% in PL531 and 40% in PL607 although we may farm out part of this share for another license to diversify our portfolio.
The rest of our portfolio is now mainly in the North Sea. Hopefully we will see drilling in those licenses from 2014 onwards. The immediate future for our drilling program will be in the Barents Sea and we are working actively on the 22nd licensing round which is largely in the Barents Sea, although we have submitted an application in the 2012 APA round for mature areas.
How do you view the pace and direction of the 22nd Licensing Round?
For Concedo the round is satisfactory in the number of blocks allocated. The industry as a whole is pushing for more blocks to be opened up. On the other hand, there are voices calling for a slowdown of the pace of the oil and gas industry activities.
My perspective is that the pace of development should continue as it is. Society should note how long it takes from the start of exploration till the start of field development and production. It normally takes over 10 years from discovery until production and we can assume even longer in the Barents Sea. If we adjust and slow down the activity level we may be at the wrong end of the cycle precisely when we need new field developments in the future. Reduction in exploration would create a very bad effect and in any case would not alleviate the pressure on the Norwegian economy over the next two to three years.
Strong exploration activity will create value that is realised 10-15 years from now.
There is certainly a challenge regarding the capacity of the Norwegian market to provide skilled people and rigs. However in many cases I do not see that a reduction in exploration will assist in alleviating these problems. It is rather production that is technology and labor intensive. In any case, good fields will always be developed. It cannot be blamed purely on exploration.
Concedo has been targeting smaller finds in mature areas. However many fields which could be developed in other countries are not commercial in Norway because of high opex costs. How does this affect your acquisition strategy?
It is true that many of Norway’s small discoveries are non-commercial and that is an issue. Concedo therefore does not target the smallest discoveries but preferably those like the Maria discovery, where it ended up containing over 100 million barrels.
In Norway, the threshold for a tie-in development is around 20-30 million barrels, a standalone would need above 100 million barrels and in the Barents Sea this goes up to 200 million barrels. For any place in mid-Norway or the North Sea, where it is located close to existing infrastructure it is much easier to find commercial fields.
However, as more stand-alone fields appear so will the commerciality of the smaller fields. We consider the cost picture when picking our exploration targets as we cannot obviously get a good price for a small discovery where it is hard to produce hydrocarbons and deliver to the market.
From a Norwegian perspective, in some ways the high costs are good as it focuses Norway’s resources on developing sizeable fields which can create real value, rather than on those small fields which can only add a marginal value. However, inflation should not continue as during the last few years and it would be good for Norway if the costs could be kept more under control.
What do you see as essential to exploration success on the NCS?
The two most important elements are firstly to have experienced people and secondly to be ready to try out new technologies. Over recent years technology has developed gradually but there has not been any major breakthrough. Concedo has trialled out some technologies such as Petromarker EM data and Gore geochemical sampling as well as various seismic techniques, but the key is to use our experienced people.
I would also say that remaining an exploration company with no plans to expand into other activities allows us to keep our focus. There are plenty of potential distractions to exploration, created by moving into other activities: expanding into operatorships, becoming listed or moving into field development which is challenging for non-operators and operators alike. Avoiding these distractions is part of our exploration success.
Are there any ways you need to adapt to carry out exploration in the Barents Sea?
The Barents Sea is less mature and there are some differences in the geology and the petroleum system. However, the whole staff at Concedo has been involved in the Barents Sea from the start. I was personally involved in planning the first well that Norsk HydroDet Norske drilled and the first well that Statoil drilled as well and later on the Goliat discovery. Many of our employees also bring international experience to the equation. Some of the opportunities and risks encountered elsewhere have been applied to our thinking about the NCS. This international experience is actually why we are so focused on the NCS, because we are aware of international risk factors which prevent value creation. The Norwegian authorities have laid a lot of good ground work in enabling value creation.
Since 2001 the number of E&P companies operating on the NCS has increased significantly from 14 to around 80 today. How do you see Concedo positioned in this upstream environment over the coming years?
Looking at the number of companies applying in concession rounds the number is actually around 40-50 companies. These are what I would regard as the active companies. That said, there is no doubt that competition for licences is increasing but as Concedo does not strive to have an enormous number of licenses and concentrates on what we really want, we think there are sufficient good opportunities and other companies will focus on other licenses.
The 22nd licensing round defines some areas which will see a lot of competition and we will just have to see how this competition unfurls. The cost of data for some areas is also becoming very high. Applying for many areas would be a very high cost strategy and we therefore had to decide early on which ones we were after. However, there are also many farm-in deals and Concedo is an experienced partner in Norway. We can always contribute with technical competence to a license group. Additionally, our board including a former CEO of Statoil has a strong commercial focus which is complementary to a very technically focused organisation.
Over the next few years we are hoping for one or two major discoveries and work on the subsequent appraisals, but we will sell these prior to development. The strategy that we defined in 2006 has been very sensible for us. We will continue to follow this strategy going forward. Listing the company would have brought higher activity, but we are happy with the progress so far.
We will also continue to have fun at work. This is important as exploration is often creative work and you need to have a free flow of ideas which is enabled by having an open and friendly work place. Also, we are only going to drill prospects that we really like.
To use the words of the Ministry of Petroleum and Energy, oil and gas is an industry for the future and Concedo is happy to be a part of that.