Petoro role and strategy

A driving force offshore Norway

Petoro role and strategy 2

High oil prices, hightened

governmenttake

Examples ofhidden ”re-

nationalisation”

Focus on politics =suboptimalsolutions?

= cost overruns

Too much Statoil = SDFI

Huge t-o-p gas deals by Statoil,

= later GFU

1986 price fall = tax cut

= new investments

Majors complain, .....but remain

Development of the NCS business

MARKETOPPORTUNI

TIES KNOCKS

Little awarenessin Norway

”Let the foreigners do this”

Oklahoma pioneers

Industry boom

by private enterprisebut then....

State takes control through Statoil,

NPD, regulations

and the taxman

Send inthe state

1960’s 1970’s 1980’s 1990’s 2000’s 2010’s

Politics before value?

New areas openup for the industry

internationally=competition for

capital and people

Improved t&c

Norw. industry sees need to

compete abroad

Statoil wins strong positions through

BP alliance

Gov. accepts EU liberalisation

of licensing and purchasing

Commercial thinking

Further t&c improvements

royalty, CO2 tax

Parliament cutsred tape

Gov. accept EUgas liberalisation

GFU out – comp. based gas sales

SDFI sale, Statoil privatisation

PetoroGassco

Predictable t&c

New drive for the Arctic

Global positioning

“Resourcenationalism”

Mo

re g

ov

ern

me

nt

Mo

re m

arke

t

SDFI established

1985

Petoroestablished

2001

Statoil established

1972

Petoro role and strategy 3

Petoro offshore Norway

IOCs

Others • Petoro act as owner on behalf of the government (§11)

• Role: licensee in the offshore licenses/fields– Votes for the government share– Jonit venture cooperation– Only the NCS – and not operator– 165 licenses/jv interesets – 40 producing fields

• Commercial goal– Max. value of the SDFI– Influence through ownership/competence – not by

exercising authority

• Monitoring Statoils marketing/sales– Max. value, just distribution of cost/income

• Financing, management, owner control: – Parliament funds operations– The Minister is the General Assembly– Professional board– Government rules for economic control asplies– Audit General

Cash flow 103,6 bn NOK

Production (kboed) 1,08 mill boe/d

Number of licenses 146

Number of fields 36

Number of employees 70

Value of SDFI 1.1.2010 865 bn NOK

Petoro role and strategy 4

What is SDFI – and Petoro?

• The State Direct Financial Interest = A portfolio of direct government owned oil and gas reserves, fields and facilities for processing and transportation.

• Petoro AS= A government owned management company which acts as the owner of SDFI on behalf of the government in licenses and other joint ventures where SDFI has an ownership share. Petoro’s goal is to maximize the economic value of SDFI – based on sound business principles.

Petoro role and strategy 5

SDFI basics

• SDFI (State Direct Financial Interest)

• 1985: SDFI established

• SDFI is owned by the Norwegian State– SDFI accounts (income and expenses) are integrated in the

Norwegian State’s accounts and a part of the Norwegian State’s budget

• From 1985 to 2001 SDFI was managed by Statoil– Management based on business principles – Towards third parties Statoil appeared to be owner of the SFDI

• SDFI represents about 1/3 of Norway’s reserves/production

Petoro role and strategy 6

Petoro basics

• Petoro was established in May 2001

• Petoro - management company for the SDFI portfolio– Took over the management after the privatization of

Statoil

• Formal position as a licensee– Petoro is a partner in the production JV’s – never

operator

• Petoro is a State owned company, funded by Parliament via the State budget

Petoro role and strategy 7

Main principles of Petoro in the Petroleum Act (Section 11)

• The State participates in the petroleum activity by retaining a share in selected production licenses or taking a share in infrastructure ventures when granting the license.

– This share is the SDFI-share owned by the State

• Petoro 100% state-owned company charged with managing the business aspects of the SDFI interests in the Norwegian petroleum activity

– Petoro is a licensee and party to all license agreements and other relevant agreements

• All income from the SDFI-share belongs to the State

• All costs or investments relating to the SDFI share are covered by appropriations in the annual State budget

• All costs of Petoro as the management company are covered by appropriations in the annual State budget

• Separate accounts for SDFI and Petoro

• The Norwegian State is by law liable for all obligations undertaken by Petoro

• Petoro is a limited company and standard corporate governance principles apply– However; the board have some additional obligations; asset transactions are decided by the

Minister under mandate from the Parliament

Petoro role and strategy 8

The wider government context

The Norwegian Parliament

The Government

Ministry of Labour(MOL)

Ministry of Finance (MOF)

Ministry of the Environment (MOE)

ShellExxonMobilConocoPhillipsTotalBPEnietc.

Oil and gas companies

Statoil (ca 67 %)

Ptoro (100%)

STATE OWNERSHIP EXERCISING AUTHORITY

Norwegian Petroleum Directorate

(NPD)

Petroleum Safety

Authority

Ministry of Petroleum and Energy (MPE)

The Climate and

Pollution Authority

Petroleum tax office

Government Pension

Fund Global

Petoro role and strategy 9

From oil to money (PET to ORO) …and from money to more money

Yearly SDFIcash flow

~100 bn. NOK

6

19

24

256

62

60

T rondheim

Kristiansund

Ber genOslo

Stavanger

Harstad

5

5

1 23

4

10987

15 16 17 18

26 27

32

31

29

3433 35

62026203

6204

36

67

65

4 2

-400

-200

0

200

400

1970 1980 1990 2000 2010 2020 2030

Transfer to the petroleum fund

Net profit excluding petroleum

Net cash flow from petroleum

SDFI = 35-40%

Petoro role and strategy 10

Big job for small company

• PRECONDITIONS FOR SIZE:– Statoil markets and sells all the oil and gas under a common strategic

ownership– Parliament accepts that Petoro’s responsibility for a number of small

and non-strategic fields can be outsourced to other companies– Parliament accepts that Petoro does not need all competencies and

capacities of the international oil companies– Petoro has been able to muster competence and capacity from two

competing Norwegian companies, Statoil and Hydro

• THINGS HAVE CHANCED– After the Statoil-Hydro merger, Petoro needs to do more technical

and commercial work/studies of its own– The maturing of the NCS implies increased focus on big mature fields,

not least by Petoro due to major state ownership

Petoro role and strategy 11

Champion of prioritization

80%

80 % of value in first 10 assets, 95 % in first 20

0

100

200

300

400

500

600

700

800

900

1000

Accu

mu

late

d N

PV

@ 7

% b

efo

re t

ax

Wood Mackenzie - 2006

License management:• Active• Selective• Administrative

Petoro role and strategy 12

Influencing business decisions

Ability to influencespending Actual spending

IOR pilots

Drilling efficiency

Maturingreserves

Drainage strategy

Area development

options

Decision phase Execution phase

Active (but not quite as active) partnerPro-active partner

• Progress monitoring• Challenge and support operators (partly by leaving them alone…)• Feedback/learning• Benchmark• Transfer of experience

Availabilityof drilling

rigs

Operationsstrategy

Integratedoperations

Technologyqualification

Quantum leaps in pro-

duction drilling

NCS – opportunities and challenges

Petoro role and strategy 14

Petoro role and strategy 15

NCS: Great opportunities – and challenges

20152010

Total: 4,5 mill boe/d(2004)

1970 1980 1990 2000

Total

Oil

Oil: 3,4 mill b/d(2001)

Illustration based on NPD-outlook 2009and reduced estimates in 2011

Prognosis 2011-2015(NPD 2011)

Historic production NCS (Source: NPD)

•Potential for high output – long time

•Smaller discoveries – new areas to drill are needed

•More to gain from fields than from new discoveries

•Time criticality in mature fields

•TURNAROUND: Ways of the past won’t meet challenges of the future

2020 2030

Recoverableresources(NPD-2011)

Undiscovered DiscoveredResources in fieldsReservesProduced/sold

Petoro role and strategy 16

Mature fields – backbone for further development

80% of SDFI oil and gas production from 10 field i the period 2010-2025

0

200

400

600

800

1 000

1 200

2010 2015 2020 2025

kboed

Other fields

10 biggest fields in 2010

Source: RNB 2010

Win- win, big- small fields

Petoro role and strategy 17

2-3 times more production wells needed

2.5 km

Source: Statoil

1985

Scource: Statoil

2005

Produksjonsboring

0

100

200

300

400

500

600

700

800

2002 2004 2006 2008 2009 2010

millio

ner kro

ner

0

10

20

30

40

50

60

an

tall

I nvestering per brønn fra bunnfast innretningInvestering per brønn fra flyttbar innretningAntall brønner

REALITY:

• No. of wells halved since 2001

• Well cost quadrupled

WE NEED:

• Better understanding of reservoirs and reduced well cost to increase investors’ confidence and drill 2-3 times more wells

No.

of

wells

NO

K m

illion

s

Investments per well from fixed structureInvestments per well from floating structure Number of wells

Petoro role and strategy 18

The installations live longer than designed for

• Increased production - increased life

• Increased lifetime - opportunity for the development of new discoveries – and IOR/EOR

•Aging – requires investment in integrity management

Scource: RNB

Installasjonenes alder ved planlagt fjerningstidspunkt

0

10

20

30

40

50

60

70

2020 2025 2030 2035 2040 2045 2050 2055 2060

Planlagt fjerningstidspunkt

Inta

llasjo

nens a

lder

ved f

jern

ing

Typical lifetime is 25- 30 years

Installations age at expected abandonment

Expected abandonment

Inst

alla

tions

ag

e a

t exp

ect

ed

ab

and

onm

ent

Petoro role and strategy 19

Time

Investments are time critical

• Production wells• Modifications/ infrastructure

Investm

en

ts

Illustration of typical field life span

Production

Petoro role and strategy 20

Golden times

….which harm profitability and disguise

the need for time critic

al investments

and cost control

Petoro role and strategy 21

Oil production falling faster than we think

2001:

3,42 mill b/d

What we thought in 2005 about 2010

2010:

1,86 mill b/d

45% ned fra

2001

Kilde: OD

Petoro role and strategy 22

Oljeproduksjonen faller

Ny kostnadstsunami

3,42 mill fat/d

1,86 mill fat/d

2001 2010

- 45,5% Investeringer i SDØE-porteføljen

Vi investerer ikke ihht planer

Trenger flere brønner – borer færreLong term challenges

Time critical measures

Petoro role and strategy 23

Challenging concentration of ownership

• Diversity of IOCs, NOC and

others was key to successfuldevelopment of the Norwegian oil and gas business

• Picture have changed:- Petoro big partner - Statoil dominating operator - IOC drive for global growth may lead to reconsiderations- New players – in exploration, not in mature fields

Eierskap i SDØE/Petoros 11 viktiste felt

Eierandeler

0

20

40

60

80

100

120

Statoil/Hydro SDØE Andre Statoil SDFI Others

Partner shares of key fields

Others: 12 companies, mainly IOCs, avg. share: 9%

Petoro role and strategy 24

Petoro’s strategy for the period 2010 – 2015

0

200

400

600

800

1 000

1 200

2010 2015 2020 2025

kboed

other fields

10 largest fields in 2010

0

200

400

600

800

1 000

1 200

2010 2015 2020 2025

kboed

SDFI portfolio, dependant on few fields with long production lives

SDFI-portfolio - From oil and gas to gas

• Realise the potential in and around large mature fields

– Increase the lifetime of prioritised installations through technology selection, efficient drainage methods and more wells

– Prioritize selected installations to main hubs and provide solutions for area discoveries

• Holistic and timely development of the gas value chain

– Robust sales strategy for a challenging market (short and long term)

– Optimizing capacity investment and the phasing of new fields

• Explore business opportunities in the Vøring and the Barents Sea south

– Continued exploration and maturation of resources – Snøhvit train 2 key in the Barents Sea

– Ensure prioritization of the SDFI resources

Petoro role and strategy 25

HEIDRUNImproved understanding of the

reservoir, more and cheaper wells, draining strategy

Petoro’s top three fields

Petoro role and strategy 26

GULLFAKSConfidence in the

reserves base, long term draining

strategy, profitable and safe water

injection, increased drilling pace, consider

new well head platforms

Petoro’s top three fields

Petoro role and strategy 27

Foto/illustrasjon: Statoil

SNORREmore wells, increased gas injection and advanced

EOR. Petoro initiative for 1-2 new wellhead platforms. Cost of aging.

Petoro’s top three fields

A driving force offshore Norway