Annual Press Event 23 March 2007 Reinier Zwitserloot, Chairman of the Board of Executive Directors of Wintershall Holding AG+++ The spoken word applies ++++
Ladies and Gentlemen,
We are pleased to be in Berlin today and to see some familiar faces right away. In the last few years many of you traveled to Kassel for our Annual Press Event. This year we have come to Berlin. So, why the change of location?
In the last few years the energy sector worldwide has experienced a rapid rise to the top of the political agenda. There is hardly any other area that takes up such an important position, barely any other area that has such a determining influence on policy-making and that in turn is being increasingly shaped by policy makers. At the same time, we have consistently developed our activities internationally. So it only seems logical that we now host our Annual Press Event in the capital city.
A prominent artist once remarked that a Berlin audience notices what you want to say before you’ve said it and I’m sure there’s a lot we could leave out. So allow me to get straight to the point.
First let me say a few words on the dynamic developments in the international energy markets, our industry and the general global conditions.
The hunger for energy is growing undiminished all round the globe. Despite energy savings and the use of alternative energies, international demand for oil and gas will continue to rise, just as it did in 2006. On the other hand, domestic production in the United States and the European Union is still declining and thus they are becoming increasingly reliant on energy imports.
And the new players on the global market, especially China and India, are striving to compensate for their shortage of raw materials by means of worldwide imports and direct access to oil and gas reserves. They pay high prices in order to meet their national energy requirements. Energy procurement has now become a determining element of their foreign policy.
At the same time the producing countries are very aware of their increasingly powerful role. The world’s energy reserves are managed and marketed according to economic interests and, increasingly, national interests. That applies to OPEC countries like Qatar, Saudi Arabia and Venezuela as much as energy producers in Europe like Norway. And this applies equally to Russia.
We respect this position and have responded to it with offers of partnership. As you may know, we were the first to conclude a 50/50 joint venture with Gazprom in Russia for the production of natural gas. Others will have to align themselves to this way of working together.
A few words on Russia's role. Because there can be no supply security without Russia!
Russia is the country with the largest energy reserves in the world. But it is also a country that for the foreseeable future is securing its economic development by means of selling gas and by way of long-term contracts with Europe.
There’s a simple reason for this: crude oil and natural gas make up for more than 50 percent of the Russian Federation’s export trade. Furthermore, Russia delivers more than 60 percent of its exported natural gas in one direction: Europe. And in Europe, Germany is Russia’s most important trading partner. Unfortunately, this is all too often forgotten.
Presently people only perceive Russia as a dominant energy power. A lack of knowledge, insecurity and fears concerning supply all play a role in this regard.
Of course, one can criticize Russia. But we shouldn’t measure it with a different yardstick than we use for other suppliers. And one thing is clear:
Those who fear energy dependency on Russia should not look to Iran of all places.
Incidentally, regarding our security of supply, in Europe we are in a very comfortable position and we should count ourselves lucky.
80 percent of the global reserves of natural gas are within a 4500 kilometer radius of Berlin and are easy to reach with pipelines. Europe can obtain natural gas by various transport routes from assorted producers in many different countries of origin.
And it is precisely Europe’s favorable geographical location that we are exploiting with our “Gas for Europe” concept, which is proving successful and which we will maintain. The concept means finding and producing new natural gas in and around Europe and helping to shape the connecting infrastructure – thereby bringing the gas to European customers.
Due to the excellent growth it has seen so far and the positive outlook for its subsidiary Wintershall, BASF, the world’s leading chemicals company, has decided to further expand its oil and gas business: it will invest more than 3.5 billion euros by 2010 alone. With these investments BASF is creating a solid footing for continued profitable growth in its oil and gas sector.
Our growth strategy is simple but successful!
Namely, we will continue to focus on expanding our strategic partnerships. This applies to both sectors, Exploration and Production, and Natural Gas Trading.
Our cooperation with Gazprom, the world’s largest producer of natural gas, is unique: it encompasses the exploration and production of natural gas in West Siberia and its transportation via the Nord Stream Gas Pipeline in the Baltic Sea to its further distribution over our shared pipeline network in Germany and to other European countries. Further developing this partnership gives us the opportunity to further increase our competitive advantage. Alongside the strategic partnership with Gazprom, we will also broaden our cooperation with other reputable producers in the oil and gas industry.
Our strategic partnerships are so successful because each partner contributes their strengths, thus creating a relationship of symbiosis. At Wintershall we also excel at developing difficult oil and gas deposits commercially. Hence another element of our strategy is to actively promote our much sought-after technical expertise.
Our strategy proved to be the right one in practice last year too. And it led to positive results.
Following sharp increases in recent years, in 2006 we were able to maintain our production of crude oil and natural gas at the same high level as the previous year, at 111 million barrels or 14.8 million tons of oil equivalent. This was despite plant interruptions for planned maintenance work in Libya and the OPEC restrictions towards the end of the year.
In Natural Gas Trading we have further increased our sales. Overall, at 351 billion kilowatt hours, the sales of our three natural gas trading companies were a good 6 percent higher than in 2005. Of this, 228 billion kilowatt hours – a good two thirds in other words – were attributed to WINGAS, which has consequently strengthened its market position both in Germany and internationally, stepping up its natural gas sales by a good 8 percent from the previous year - despite the mild temperatures at the end of the year. The positive development of the spot market business made a considerable contribution to increasing sales.
The general climate was certainly good for both sectors in 2006. The global competition for energy has manifested itself not least in much higher oil prices. Calculated in euros, the price rose in 2006 by a yearly average of 8 euros to 52 euros per barrel. While in 2005 the results for Natural Gas Trading were still under the strain of unfavorable underlying conditions, this trend was reversed in the last financial year.
The positive general climate and the expansion of the Natural Gas Trading pushed our net sales to third parties up to 10.7 billion euros overall and our profit before special items to 3.25 billion euros. As such Wintershall has consolidated and strengthened its position as an important contributor to income of the BASF Group.
This success was due to further progress in our international activities. For example, in November we put into operation a new natural gas field in the Netherlands. And in 2006 production started together with our partners in Argentina, in the Aries deposits off the coast of Tierra del Fuego, one of the southernmost natural gas fields in the world.
We have also made progress with the expansion of our Exploration and Production activities in Russia and the Caspian Sea: drill bits bored their way into the permafrost in Siberia for the first time on behalf of Achimgaz, our Russian Joint Venture with Gazprom. And last year, just three years after the joint venture was founded, the first production wells were successfully completed. The construction of the above-ground facilities for future production has suffered delays, particularly due to weather conditions. However, we have made adequate progress now to commence operation this summer.
We have also taken a major step forward in our activities in the Siberian natural gas field Yuzhno Russkoye. As you know, BASF and Gazprom have agreed on an exchange of assets and we are currently clarifying the final details. This exchange is expected to be completed by the middle of this year.
In this context allow me to comment on the PR storm of a Texan company. This company is currently attempting to have our agreements with Gazprom on Yuzhno Russkoye annulled by the courts. We consider all the claims raised in this matter unfounded.
But let me get back to what we do.
Our Exploration und Production sector managed to drive forward important projects both in Europe and Northern Africa.
In Denmark we received new exploration licenses as future operator for three blocks bordering on German territorial waters. In Norway we managed to obtain a share of a license operated by the American company ConocoPhillips, so overall we are now participating in four blocks.
We have also made progress with our projects in Germany. A new drilling rig went into operation on the Mittelplate production island in the North Sea which allows us to reach additional oil-bearing sandstone layers. We also commenced gas production from a deposit extremely difficult to access near Leer in East Frisia. In this so-called ‘Tight Gas’ deposit, natural gas is trapped in very compact rock. We are now bringing it to the surface using special technology.
In Libya, thanks to our exploration expertise and our decades of experience with the country and people, we were able to prevail despite intense competition. Last year we won the contract for an exploration area of 11,500 square kilometers in the south of the country: an area almost as large as Schleswig-Holstein.
Overall in 2006 our company took part, either directly or via subsidiaries, in 32 completed exploration and appraisal wells – twice as many as the previous year and 14 of which discovered new oil or gas reservoirs. The results of 10 additional exploration wells were not available at the end of the year.
There have also been great developments in our Natural Gas Trading projects: all the pipes laid for the extension of our WINGAS pipeline system were installed in the ground on time and within budget. New compressors were connected to the network on schedule. This enabled us to increase the transport capacity of the STEGAL pipeline in East Germany by over 50 per cent and the capacity of the WEDAL pipeline in North-Rhine Westphalia by about 30 percent. What’s more, we were able to use the extended systems last year.
In addition, preparations are currently underway for the construction of the onshore connection of the Nord Stream pipeline to the WINGAS pipeline system. The OPAL, which will run over 480 kilometers from Greifswald to Olbernhau on the Czech border, will go into operation in 2010. The NEL will run south of Bremen from Greifswald to Achim and go into operation in 2012. We have also advanced with the construction of storage capacity for Europe. In Haidach, on the German-Austrian border, we have made sufficient progress with the first construction phase of the second largest storage facility in Central Europe to allow it to go into operation as early as this summer. The administrative procedures necessary for the construction of a natural gas storage facility on the German-Dutch border near Jemgum are currently in progress.
Yet in the very place where new storage facilities are urgently needed, and the national government has recognized this fact, regional small-mindedness and bureaucracy are paralyzing important investments in supply security. I’m speaking about the United Kingdom.
I’m sure you are already aware: in Great Britain they start running out of natural gas even in a mild winter because there are too few storage facilities in the country. Just four percent of the annual gas requirements can be stored in the gas storage facilities in the country, of which there are just five. And 80 per cent of the storage capacity available is controlled by one company.
To give you a comparison: in Germany about 20 per cent of the annual consumption is stored in more than 40 gas storage facilities and there are about 20 different operators involved.
During the last proper winter Great Britain asked continental Europe to show solidarity and provide assistance. Indeed, we are disposed to help, and we are willing invest a large sum in the construction of a major natural gas storage facility in Saltfleetby in central England. In so doing we would be significantly improving the supply situation in the country. But we’re not allowed to do so yet.
Apart from this matter, ladies and gentlemen, we are really making headway!
At the start I spoke about BASF’s intention to invest more than 3.5 billion euros by 2010 in expanding our oil and gas business. 1.9 billion of this will be invested by us in the construction of Nord Stream Gas Pipeline in the Baltic Sea and in extending the infrastructure in Germany. 0.8 billion euros of that is earmarked for the Russian natural gas projects, Achimgaz and Yuzhno Russkoye, and another 0.8 billion euros is planned for projects centered on Europe and North Africa.
Every euro is a direct investment in the supply security of Europe! But we are by no means investing in this security alone, but mostly together with our partner Gazprom, in Germany and in Russia, at every stage of the process from the well to the customer.
In this way we are helping to secure Europe's energy supply.
Ladies and gentlemen, companies that make investments want to make a profit, not be an obstacle.
The opportunity to make profit is the driving force of the market economy. Thus noone can expect us to operate our gas network as a loss-making business in the future. In contrast to the networks of Deutsche Telekom or Deutsche Bahn, our network has not been built or expanded with the taxpayer’s money so neither is there any public obligation that could justify intervention in ownership rights.
The WINGAS gas network in Germany was not created in a state-protected monopoly either: rather, it was built solely with the financial means and courage of our shareholders – with the goal, true to market-economy principles, of breaking down the existing monopolistic structures in the German energy sector and launching competition – and the opportunity to earn money by doing so.
I can hardly convince my shareholders to invest billions in infrastructure in Europe if it is uncertain whether we will even be able to keep our property. And the idea of combining all the operators’ networks creates a new cartel, not competition.
There can only be one answer to the regulation initiatives of the EU Commission: One cannot prescribe competition!
If you want to promote competition you have to create more intelligent models than expropriation!
We have built up an extremely efficient network in Germany which has allowed us to take supply security as a given. We need an investment-friendly climate to make sure that this remains so in future too. And we need stability.
Stability in Europe means: major investments without the risk of expropriation.
Stability with regards to Russia means: a dialogue in the spirit of partnership between the EU and Russia which is aimed at cooperation instead of conflicts.
Ladies and Gentlemen,
Russia and Europe have depended on each other for decades. We need the gas; Russia needs our sales market. This interdependence commits us to partnership.
However, we cannot expect to get supply security for nothing. In return for supply security, Russia expects a guarantee that its product will be bought. That means long-term import contracts so that the large investments necessary for producing natural gas in Russia can be financed.
In the same way in which we expect Russia to be understanding about increasing import requirements, we also have to show understanding for Russia’s situation.
The Russian Federation is going through a period of political and economic restructuring at the moment. But Europe is also facing radical change. Eastern enlargement without reforming its decision-making bodies paralyzes Europe. The particular interests of individual Member States are also taking center stage in the cooperation negotiations with Russia. Europe is, in fact, obstructing itself!
Germany therefore has a key role to play this year during its EU Council Presidency and in the cooperation negotiations with Russia.
Now let’s take a look forward at our business development. We expect the favorable general conditions that marked 2006 to deteriorate in 2007. However we will offset for some of the negative impact of this with our continued good operating performance. In the field of Exploration and Production we are planning to maintain the production of crude oil at its current high level and to further increase the production of natural gas. We also wish to continue vastly expanding Natural Gas Trading.
Sales and profit will remain at a high level in 2007, though they are not expected to reach the peaks of 2006.
We are positive about our future business development. We will even reach the growth targets we set for 2010 ahead of schedule. This motivated us to set new, very challenging targets for oil and gas production and for natural gas trading for the coming years, too.
The aim is to increase the production of crude oil and natural gas to about 140 million barrels of oil equivalent by 2010. In the same period sales of natural gas are to be further increased to at least 40 billion cubic meters.
These are, as we said, very challenging goals, but they are also attainable.
And we are certain we can succeed!
Thank you for your attention!