Annual Press Event on 9 April 2008 Reinier Zwitserloot, Chairman of the Board of Executive Directors of Wintershall Holding AG- The spoken word applies -
Ladies and gentlemen,
We are pleased see some new faces here in Berlin today alongside the familiar ones.
Energy makes the headlines on a daily basis. That was true last year, too. Today you have come to hear how we fared in an increasingly challenging environment in 2007 – and how the future looks.
With earnings before interest and tax of about 3 billion euros, once again Wintershall made a strong contribution to the BASF Group’s overall result. But you already know these and other figures from the BASF Group Annual Press Conference. Today we’d like to present our two business areas - exploration and production and natural gas trading - in more detail.
First I'd like to talk about exploration and production.
Rising costs, increasingly demanding technical requirements and the growing tendency to nationalize energy reserves are all having an ever greater impact on the global exploration and production business.
Gaining access to new reserves has become the most important challenge and competition for new sources of energy is mounting.
But Wintershall is ideally positioned strategically to withstand the increasing global competition.
2007 has shown that our strategy of focusing on selected core regions where the company has built up a high level of regional and technological expertise is exactly right.
While many large oil and gas companies are complaining of falling production quantities and are experiencing difficulties replenishing their reserves, we managed to do both. We achieved a slight increase in production again in 2007 and built up our reserves substantially thanks to our participation in the Yuzhno Russkoye gas field.
But first let me say a few words about the general climate in our industry.
Last year we saw the price of oil rising continuously and reaching record highs of nearly 100 dollars a barrel. This year the price of oil has even crossed the 100-dollar-threshhold.
However, contrary to popular belief, this price increase did not really bring us any gains. Why not?
We complete our transactions in dollars, but as a German subsidiary of BASF we keep our accounts in euros, which ultimately swallows up any increases in price for crude oil. Because of the weak dollar, the price of Brent crude calculated in euros in 2007 was not even one euro per barrel more than last year’s price.
In addition, gas prices did not develop in the same way as oil prices did. In fact, the sales revenue for gas produced from the North Sea was below the level of 2006.
The high price for crude oil leads exporting countries to raise their taxes and duties on crude oil. The countries with the resources want to maximize their share of the profits.
The producing countries are very aware of their increasingly powerful role. 80 percent of the world’s oil reserves are already in the hands of the national companies of oil producing countries.
The situation is similar for the global gas reserves: together OPEC and Russia have about three-quarters of the oil and gas reserves – although Russia’s role is much more important as far as gas is concerned.
This shift of power from the international producers to the national oil companies has put the entire industry under pressure. The independent producers are trying to find their specific role, the deposits are becoming more and more complex and demand for drilling equipment, services, materials and specialized personnel is growing all the time.
To give you an example, the rent for a drilling platform has doubled across the entire industry in the last two years.
Wintershall, like all oil and gas producers, is confronted with rising costs. And it is not possible to fully compensate for these rising costs with increased efficiency alone.
These are indeed formidable challenges for an industry. For Wintershall, in addition to our geographical and technological focus, strategic partnerships are a key element to ensuring continuing success.
We are an accepted and popular partner – for example in Russia, Qatar and Norway – by state companies and international firms alike. That gives us a competitive advantage.
And we know how to develop these partnerships. Like last year, with Gazprom, for instance: our joint production at Yuzhno Russkoye is a prime example of partnership in action, a partnership with a future.
Our strategic partnerships are so successful because each partner contributes their strengths, thus creating a symbiotic relationship. At Wintershall we also excel at developing difficult oil and gas deposits commercially. Moreover, we want to continue to promote our much sought-after technical expertise.
In our endeavors we also enjoy the backing of a strong parent company. BASF not only supports us financially, we also conduct research together and we contribute to its added value. Enhanced oil recovery, for example, is just one area in which we carry out joint research.
The majority of the natural gas and crude oil sold by Wintershall is produced from deposits for which we are the operating company.
Last year, as you can see, we achieved a slight increase in our production of hydrocarbons. We even managed to replenish 389% of the volumes produced in 2007! We owe this to our participation in the Siberian gas field Yuzhno Russkoye
We were already able to start production from the Yuzhno Russkoye field in October 2007. We are now producing large quantities of natural gas from the field together with our partner Gazprom – at the moment 35 million cubic meters per day from 63 wells.
We will already reach plateau production of 25 billion cubic meters per year in 2009 – hence, sooner than anticipated. At this level, this deposit alone can cover gas exports from Russia to Germany at their current level for another 15 years. This year we are aiming to produce 13 billion cubic meters of natural gas from this field.
Ladies and Gentlemen,
Yuzhno Russkoye is not just a Russian gas field. It is symbolic of something much greater: for the first time a German company has a key role in the production of natural gas in Siberia.
We managed to secure a 35% share in a world class project and are the envy of many.
Our technical expertise is also required in our second joint venture project, Achimgaz. We have completed the six wells in the first project phase to develop the extremely complex Achimov Formation in the West Siberian Urengoy field. The first production tests fully meet with our expectations. Our aim is to start production this quarter.
We have also succeeded in driving forward important projects in Europe ourselves as part of our “Gas for Europe” strategy.
This year we launched operations at a high-tech control center in the Netherlands. 18 of our 26 gas platforms in the southern part of the North Sea are now controlled from the mainland by radio. The new radio monitoring system helps to optimize production processes and secures the commercial production of offshore deposits.
Moreover, we are stepping up our activities in the North Sea: last year we conducted the biggest ever cross-border seismic survey in German, Danish and British territorial waters and managed to acquire promising new exploration licenses. With stakes in 11 licenses, and as operator of two, Wintershall is now well established in Norway.
Regarding our other core regions: in Libya Wintershall now processes the associated gas from all eight onshore fields where the company produces oil. This has enabled us to reduce our greenhouse gas emissions by about 2 million tones a year. Furthermore, we have set ourselves the goal of ceasing the flaring of associated gas in routine production by 2012.
The first preparatory exploration activities were conducted in the blocks acquired in Libya in 2006 in the Kufra Basin and in two onshore exploration blocks in Mauritania. We have also increased our activities in the Gulf region and were awarded another exploration license in Qatar’s territorial waters.
Overall, Wintershall took part, either directly or through subsidiaries, in 22 completed exploration and appraisal wells in 2007. 11 of these wells discovered new crude oil or natural gas reserves. Another six exploration wells had not been completed at the year end.
In our second sector, natural gas trading, we were once again able to increase sales. Sales of the three trading ventures held jointly with Gazprom (WINGAS, WIEE und WIEH) increased five percent on 2006 in the first quarter of 2007 to 368 billion kilowatt hours, despite the mild weather.
WINGAS was responsible for about 250 billion kilowatt hours of this figure. The German-Russian joint venture is one of the few companies, if not the only one, able to increase its gas sales by almost ten percent, both in Germany and in Western Europe, despite one of the warmest winters since records began.
WINGAS is a byword for supply security, as our customers already know. WINGAS is now supplying a variety of new customers in North Rhine-Westphalia, one of Germany’s most industrial and thus energy-intensive regions.
We have also seen continued growth in other European countries, even managing to acquire new customers in Belgium and in the UK.
Gazprom’s increase last autumn in its share in WINGAS GmbH from 35 percent to just under 50 percent underlines the strong partnership that these two companies share. But it also reaffirms Gazprom’s sustained commitment to and investment in the sales markets in Germany and Europe.
Our cooperation with Gazprom, the world's largest natural gas producer, is unique. It encompasses the exploration and production of natural gas in West Siberia, its transportation through the future Nord Stream Gas Pipeline in the Baltic Sea and its onward distribution and joint marketing in Germany and Europe.
By extending this partnership we are in an excellent position to cope with the growing competition.
Allow me to say a few words about Russia: nowhere - neither Norway, North Africa nor the Middle East - comes even close in terms of natural gas reserves.
These are geological facts! We cannot do without Russia!
And the question is not whether we want to make ourselves dependent on Russia or the few other countries that have the major gas reserves, but whether we want to continue to use Europe’s proximity to these major reserves as a competitive advantage.
Europe’s gas supply can only be secured by cooperating with the few producing countries on the basis of equal partnerships. Through joint investment along the entire value creation chain, from the borehole to the end customer, we share risks and guarantee supply security.
Yet Europe is resisting. Under the guise of market liberalization, EU policy is calling for increasingly strict regulatory measures.
Producers and dealers who have already invested billions in its construction are being expected to give up their ownership of the European infrastructure or agree to forced regulation by a central network operator.
And that’s not all: instead of promoting the required partnerships, the so-called “anti-Gazprom” reciprocity clause – which excludes producers as potential investors – is the height of delusion and a danger to Europe’s supply security.
We do not believe the new EU proposals will lead to more competition and a greater willingness to invest. Quite the contrary.
That’s why we strongly support the alternative model proposed by the federal government and seven other EU Member States, namely, “effective and efficient unbundling”.
The so-called “third way” takes into account the unique features of the energy markets. It is an efficient addition to the existing directives, which should first be implemented EU-wide.
The EU is well advised to give this alternative serious consideration.
We expect firm commitments and stable regulatory conditions from the policy makers so that we will be able to make major investments in this business in future as well.
These are vital for meeting Europe’s growing demand for gas, accompanied by import dependency, in the future, too, and for securing supply for Germany and Europe.
We are ready to get involved in all areas of the value creation chain with our “Gas for Europe” strategy.
The planned construction of the Nord Stream Pipeline through the Baltic Sea to the German coast and its associated onshore projects will considerably strengthen the network infrastructure.
The Nord Stream pipeline is coming because we really need it: in 2020 the EU will require about 200 billion additional cubic meters of natural gas. In other words, we need Nord Stream and Nabucco and / or South Stream and other LPG imports on top of that, provided they are available to Europe.
The approval process and extensive environmental assessments necessary for the Nord Stream project have been set in motion. Purchase agreements for the pipes have already been concluded and installation capacity has been secured. We still expect deliveries to commence in 2011.
We are also making progress with the pipeline links. Now that the regional impact assessment procedure for the onshore connection (OPAL) to the Nord Stream pipeline has been successfully completed in two German federal states, the documents for the subsequent planning approval process have been submitted.
Ladies and gentlemen, these are major projects and huge investments, which will bring more supply security to Europe.
Natural gas storage facilities represent another cornerstone of Europe’s supply security. Last year, the Haidach underground gas storage facility in Austria, which has a working gas volume of 1.2 billion cubic meters, started operations following successful completion of the first construction stage. The planning and authorization process and the first preparatory construction work of a cavern storage facility on the German-Dutch border near Jemgum are also currently underway.
The authorization process for our storage facility in Saltfleetby is continuing to move forward – albeit slowly. Unfortunately, important investments in the UK’s supply security are still being paralyzed by bureaucracy.
We don’t want England to experience the same fate regarding supply security and gas storage as it has met for the European Football Championship this summer!
Finally, this brings me to our future prospects for our business:
For 2008 we are expecting a substantial increase in natural gas production due to our participation in Yuzhno Russkoye. Despite the fall in crude oil production, we are expecting to achieve, or even greatly exceed, 2010’s target this year, namely, to increase overall production to 120 million barrels of oil equivalent. We have therefore set ourselves a new target for 2010 of 140 million barrels of oil equivalent.
We also plan to step up our natural gas trading activities substantially. Despite another warm winter, Wintershall is striving to meet the target of 40 billion cubic meters, also originally set for 2010, before the end of this year.
We expect the oil price to remain high, but less than 100 dollars per barrel.
With higher production, higher gas turnover and high prices, we will be able to increase sales continuously so that, like this year, our earnings can once again make a substantial contribution to the BASF Group result.
Thus, to summarize, it has been a good year for Wintershall and WINGAS despite all the challenges.
Our professional team will see to it that this continues in future too.
Thank you for your attention!