with Haakon Haaland, Managing Director, E.ON Norway
Norway’s gas production is expected to eclipse oil production in the next few years. What if any impact does this changing profile have on the country and the opportunities it presents for companies like E.ON?
It’s fairly well-publicized what the production outlook is in terms of oil vs. gas, although clearly there is some uncertainty on the outlook, particularly for oil due to quite a big element of enhanced oil recovery, which is a function of the amount of in-field investments undertaken. Such investments are normally economically feasible and as such are expected to go ahead, but there is still an element of uncertainty related to the oil outlook. Gas in the near-term is relatively given, because it’s sourced from known fields earlier in their lifecycles. Moving out in time, there are two elements to the uncertainty. The first is pace of new field developments and whether they come on-stream as expected, and the second is whether more discoveries are made. Nevertheless, Norway has proven undeveloped reserves, particularly in gas, and the issue is to get sufficient installed transportation capacity to actually flow the gas. The challenge is to mature the field developments and match gas transportation with field developments, because it’s undesirable to have a lot of unused pipeline capacity, implying unnecessary pre-investment.
Of course, there’s always the tie-back possibility.
Yes, and we’re seeing more of that, but there are technical and economic challenges in the sense that, if tying back into a 10-15 year old platform, one must ensure the technical integrity of the mother platform, and that the fluids and pressure regimes match so you aren’t squeezing out production from the old field, and that the qualities of the hydrocarbons are compatible. It’s a bit of a puzzle, but there are numerous examples of where it has been successful.
E.ON has interests in Germany, the Netherlands, and Russia. What was it about Norway that made it an attractive destination to enter in 2003?
The old Ruhrgas, which was merged with E.ON in 2003, was one of the foundations for developing the Norwegian gas industry some 35 years ago, through Ekofisk, one of the first oil fields in Norway. The company was also instrumental in building the second export line from Norway after Total developed Frigg to the UK around the same time.
Ruhrgas, as a big aggregator of gas, had the capacity to commit itself to buying gas for a 20-25 year period of time, which enabled the gas pipeline to be built and thus Norway to monetize the gas, a very important step for developing the Norwegian infrastructure. It was interesting in that Ruhrgas had a first start in buying the gas from Norway, and then the next step was another cluster of fields where Ruhrgas together with German buyers contracted the entire output, which then enabled further monetization, and the big development and sales contracts on the Troll and Sleipner fields. Overall, it has been a very synergistic or interdependent evolution. The key the aggregators played was they were able to aggregate enough demand to approach a producer. E.ON Ruhrgas is among the biggest customers of Norwegian gas, and with a 25 year history, it was obvious to pursue the strategy of becoming a vertically-integrated energy company.
Recently, you gave a talk at a conference presenting prerequisites for success in the upstream sector, highlighting modern technologies, human experience and know-how, as well as luck and appetite for risk. Given these various factors, what would you identify as the most important of the E.ON strategy in Norway?
There are two facets. The first is the basic staying power, and the ability to participate in long-life, large projects requiring a lot of upfront capital. The other is the willingness to step out and participate in finding solutions to problems at hand, whether maximizing existing assets’ value or extending life, with the best way to either increase recovery ratios or tie-in satellite fields.
Speaking of that first strategic facet, what’s the most exciting ongoing project right now?
Probably the one we’re most occupied with is the Skarv development, the biggest field development going on in Norway right now of which E.ON owns 28%. It’s a big undertaking. The PDO investments were 32 billion NOK gross, making some 10 billion NOK for E.ON’s share. 2009 is the biggest year of expenditures, and the field will come on-stream Q3 2011, so we basically have another couple of years in huge investment outlays before payback.
In terms of encountering and overcoming challenges, what in your mind are the most salient examples of creativity coming together for E.ON in Norway?
Another asset where E.ON has production is the Njord field, where one of the first steps taken was to monetize the gas. When E.ON acquired it in 2003, it was an oil field, and the gas was being reinjected and not commercialized. E.ON was instrumental in maturing this field as a gas export project, which was decided upon in 2004 and came on production in 2007. The result is that production from the field more than doubled. The Njord field has been important in that it evidences the company’s strategy, how E.ON has been producing gas from Norway, and how it has been an economically important project. A significant success factor is that the company has realized money from the gas as well as a bigger revenue base to share fixed costs on, which is a clear outcome when production more than doubles.
How would you characterize your management philosophy and style?
I think E.ON has a very professional approach to business where a key pillar is the ability to make sound, informed decisions about complex issues. This takes a motivated competent team which I feel we really have. It is important to empower this team, let them do the homework and then you will be a constructive player, not the least in the many joint ventures E&P companies typically work.
Another illustration of this ethos is that E.ON started off with a producing asset, and then proceeded to do exploration, basically choosing a very focused strategy representing a step out from where we started in Njord. E.ON saw potential in the area, undertook subsurface studies to understand the geology, while investing in data, technologies, and techniques which allowed us to do so. The company started drawing concentric circles around the infrastructure, and went further out with more data and a better understanding, and now ahead of the 20th round pretty much has a complete picture of the Norwegian Sea by starting at the centre and expanding outwards. However, this means E.ON is not in the Barents Sea, and there are a couple of reasons for that. One is that we believe it’s right to be focused, and that requires resource concentration, investing in data and techniques necessary for understanding, which implies resources for people as well as hardware like industry-standard interpretation tools and workstations.
In the next few years, one of the more significant developments will be the Skarv field coming onstream, but in the next five to 10 year time horizon, where do you want to bring E.ON in Norway?
The five year horizon is clearer in our than in many other industries, because for E.ON in the next five years what we are going to do – and it’s no secret – is to maximize the value from Njord, and then do the same thing with Skarv, and then explore outside of those areas. Nobody knows what exploration will bring; it can bring a lot, or nothing. E.ON will have a program for exploration, with close to 30 licenses now of which seven are operated. What E.ON wants to do is develop as an operator, having started that since evolving from our non-operator status upon entry. Now, the company has built a portfolio of licenses we have basically operated and have done the work, having replaced StatoilHydro as operator on PL350, and the dream is that on one of E.ON’s operated licenses we will make a big discovery, develop it, and build on it. That’s what we’re hoping for, but it’s very hard to say if and when that will happen. Therefore, it’s very important E.ON gets the most value out of these assets and maximizes their recovery. This comes back to what we’ve done up to now and will continue to do on Njord, which is basically to drill more production wells, increase field recovery, and tie in satellites to lower unit cost and keep the production plateau as long as possible. There has been quite a lot of evidence of this strategy around Njord, and E.ON is confident the same will be true of Skarv. There are very good exploration prospectives around the field, and as the field gets into production the goal is to explore there and tie them in, and thereby increase the value of the assets. It’s a two-pronged strategy: getting the value of the assets, and then in a way develop as an operator as we explore.
What is your final message to OGFJ readers?
The main message is really that E&P is important for E.ON, we are here as a long-term player, and are a constructive part of the solution in terms of getting the most out of Norway’s hydrocarbon resources.