Strategic partnerships boost worldwide competitive advantage
Total investments worth 3.5 billion euros by 2010
Challenging growth targets
Russia is an important partner for energy supply
Security for investments in infrastructure
Berlin / Kassel. BASF subsidiary Wintershall will continue to develop its successful oil and gas business with investments worth more than 3.5 bil-lion euros by 2010. The investments will flow into the exploration and pro-duction of natural gas and crude oil in key regions, particularly in Siberia, in the construction of the Nord Stream Baltic Sea pipeline and the significant expansion of the company’s own natural gas infrastructure in Germany. Based on the encouraging growth figures it has seen so far and the positive outlook for its oil and gas business, Wintershall has set challenging growth targets for the coming years. The production of crude oil and natural gas shall be further increased and natural gas trading will also be intensified. "In particular the development of the strategic partnership with Gazprom gives us the opportunity to further boost our competitive advantage world-wide", Reinier Zwitserloot, Chairman of the Board of Wintershall Holding AG, commented on Friday at the Annual Press Event in Berlin. "Our co-operation with the world largest natural gas producer is unique: it encom-passes the exploration and production of natural gas in West Siberia, its transportation through the Nord Stream Baltic Sea pipeline and the distribu-tion via our gas pipeline grid”.
Key role for Germany
Mr Zwitserloot spoke up in favor of broadening the energy partnership with Russia, pointing out that Europe cannot achieve supply security without Russia. Mr Zwitserloot also referred to Germany’s key role in the dialog between the EU and Russia in light of the country’s EU Council Presidency. At the same time, he warned against interfering in ownership rights in view of the large investment sums needed in the European natural gas infra-structure. "If there is a risk of expropriation, the major investments needed, which only the private sector can shoulder, will not materialize", Mr Zwitser-loot warned.
He also pointed out that Germany has traditionally enjoyed excellent rela-tions with Russia and has been its biggest and most important trading part-ner for years. Crude oil and natural gas make up for more than 50 percent of the Russian Federation’s export trade. "For the foreseeable future Rus-sia is securing its economic development by means of selling gas and by way of long-term contracts with Europe", the Chairman of the Board of Win-tershall explained. "While the European Union obtains natural gas from different sources, and just 25 percent from Russia, Russia supplies more than 60 percent of its entire gas exports in one direction only - Europe". Russia and Europe depend on each other, he said. "We need the natural gas, Russia needs our sales market. This interdependence commits us to partnership", Mr Zwitserloot explained. "In return for supply security Russia expects security for the sale of its products in the form of long-term import contracts and protection of investments”.
Joint investments for future supply
Joint investments by BASF subsidiary Wintershall and Gazprom in the natural gas infrastructure of Western Europe, transit pipelines and the de-velopment of new natural gas resources are the response to questions and doubts relating to supply security, Mr Zwitserloot explained. "Because com-panies that make investments want to make a profit, not be an obstacle". The opportunity to make profit is the driving force of the free market econ-omy, he said. "Therefore, nobody can expect us to operate our gas network as a loss-making business in the future. Who is going to invest if it’s uncer-tain whether you can keep your property and use it commercially. The EU Commission’s idea to combine the grids of all operators and put them un-der state control would create a new cartel, not competition. If you want competition, you have to come up with more intelligent models than expro-priation”, Mr Zwitserloot urged.
The challenge could only be mastered through entrepreneurial action and investments, Mr Zwitserloot explained, adding, “We have always taken supply security for granted. To ensure that we can continue to do so in the future, we need an investment-friendly environment and close cooperation with the producers.”
Worldwide demand for energy increases
Crude oil and natural gas will continue to make a significant contribution to meeting the world’s demand for energy in the future – despite alternative energies and a more efficient usage of energy. Demand for both fuels, crude oil and natural gas, is undiminished, and is set to grow further – amid hotly intensifying competition for resources around the globe. This trend dominated the branch again in 2006. Encouraging developments were recorded in both sectors, the Exploration and Production of oil and gas and Natural Gas Trading, both in terms of profit growth and in projects and ventures.
Crude oil and natural gas production almost at level of previous year
In spite of a planned outage for maintenance in Libya and production re-strictions at the end of 2006, oil and gas production generated 111 million barrels or 14.8 million tones of oil equivalent, thus almost maintaining the high level reached in 2005 (112 million barrels oil equivalent). Thus the BASF subsidiary has already come very close to meeting its ambitious tar-get to increase the production of crude oil and natural gas by 50 percent in the first decade of the millennium. To compare: In 2000 Wintershall pro-duced 82 million barrels of oil equivalent.
The market environment for the Exploration and Production sector was favorable in 2006: Compared with the previous year, the average price for Brent crude oil, the benchmark oil price, rose by 11 U.S. dollars a barrel (159 liters) to an average of 65 U.S. dollars a barrel. Calculated in euros, the price of Brent crude rose by 8 euros per barrel to 52 euros per barrel.
Natural gas trading increased in Germany and abroad
Positive results were obtained also in the second sector – natural gas trad-ing: the volumes sold by the three joint-venture companies (WINGAS, WIEE, WIEH) totaled 351 billion kilowatt hours (2005: 330.2 billion kilowatt hours), an increase of +6.3 percent. The share attributable to WINGAS was 228.2 billion kilowatt hours (2005: 210.7 billion kilowatt hours). Further-more, in 2006 the company grew more than the market in Germany and was able to further increase its natural gas sales abroad. The positive de-velopment of the spot market business made a considerable contribution.
While the results for natural gas trading in 2005 had been impacted by negative conditions, this trend was reversed in the fiscal year that has just ended. The high oil price in 2005 had led to an increase in purchase prices for natural gas, which could only be passed on to customers after a time lag. In 2006, by contrast, the significant improvement in external conditions helped achieve excellent sales levels for the year.
Maximum values in sales and profits
Wintershall, a wholly owned Group company of BASF Aktiengesellschaft, reported an increase in profit from operating activities1 in 20062 to 3.25 billion euros (2005: 2.41). This result again makes Wintershall the most profitable segment of the BASF Group. The Exploration and Produc-tion sector generated 2.65 billion euros of profit (2005: 2.09) and the Natu-ral Gas Trading sector 605 million euros (2005: 316). The positive environ-ment supported the development of both sectors in equal measure.
Compared with 2005, net sales (sales excluding natural gas taxes) to third parties rose by 40 percent to 10.7 billion euros. Natural Gas Trading con-tributed 6.1 billion euros to this increase, while Exploration and Production generated an additional 4.6 billion euros.
Advancement of the “Gas for Europe” strategy
At the same time important projects were further developed in both sectors. In November last year Wintershall put into operation a new gas field in the Netherlands. Together with the partners, production started in Argentina, in the Aries deposits off the coast of Tierra del Fuego, one of the southern-most natural gas fields in the world. We also made progress in the expan-sion of our E+P activities in Russia and at the Caspian Sea: Achimgaz drill bits bored their way into the permafrost in Siberia for the first time. Just three years after establishment of the joint venture (50/50) the first produc-tion wells were successfully completed last year. The construction of the above-ground facilities has now made sufficient progress to allow us to commence production this summer. Our involvement in the Siberian gas field Yushno Russkoje is also progressing. The exchange of the assets agreed between BASF and Gazprom should be completed by the middle of the year.
Focus of exploration changed
Wintershall is broadening its activities in Europe as well. In Denmark the company received new exploration licenses as future operator for three blocks bordering on German territorial waters. In Norway Wintershall ob-tained a share in a license led by the American company ConocoPhillips. Overall Wintershall is now participating in four blocks in Norway.
In Libya the BASF subsidiary prevailed despite intense competition. Last year it 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. Wintershall has been active in Exploration and Production in Libya since 1958 and produces crude oil from 8 onshore and one offshore fields in the Mediterranean. Wintershall has already invested more than 1.2 billion US dollars in Libya and drilled more than 120 wells there.
Overall in 2006 our company took part, either directly or via subsidiaries, in 32 completed exploration and appraisal wells – twice as many as the previ-ous 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. This good success rate is also due to the fact that we concentrated mainly on exploration near known deposits, so-called nearfield exploration, just as in previous years, a method which generally leads to a higher rate of suc-cess. "However, in the future we plan to focus more on exploration in the so-called greenfield sector - areas where the existence of oil and gas has already been established, although not in the vicinity of known deposits", Mr Zwitserloot explained.
Natural gas trading increases sales
There have also been great developments in our Natural Gas Trading pro-jects: 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 (Sachsen-Thüringen-Erdgas-Leitung, Saxony-Thuringia natural gas pipeline) pipeline in East Germany by over 50 per cent and the capacity of the WEDAL (West-Deutschland-Anbindungs-Leitung, Western German gas link) pipeline in North-Rhine Westphalia by about 30 percent.
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. 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 sup-ply security”, Mr Zwitserloot said referring to the United Kingdom.
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. 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 will-ing 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 signifi-cantly improving the supply situation in the country", Mr Zwitserloot ex-plained. "But we’re not allowed to do so yet."
For 2007, the BASF subsidiary expects the favorable general conditions that affected both sectors in 2006 to deteriorate. The company is planning to offset some of the negative impact this will have with the continued good operating performance in Natural Gas Trading. Sales and profit will remain at a high level, although they are not expected to reach the peaks of 2006. In the Exploration and Production sector, Wintershall is planning to keep oil production at the high levels of 2006 and further increase the production of natural gas.
Operationally, Wintershall wants to continue on the growth course of the past few years in both sectors and successively expand its Gas for Europe strategy. Out of the investments worth 3.5 billion euros to be made by 2010, 0.8 billion euros will flow into the Russian natural gas projects Achimgaz and Yuzhno Russkoye, another 0.8 billion euros are planned for projects in Europe and North Africa. 1.9 billion euros shall be invested in the construction of the Nord Stream Baltic sea pipeline and the extension of the natural gas infrastructure in Germany.
In addition, the Company wants to keep its expenditure on exploring for new fields and expanding existing ones at a high level.
Challenging new growth targets set
The very encouraging growth figures so far and the positive outlook moti-vated BASF to set challenging new targets for the oil and gas production and for natural gas trading in the coming years, too. Thus Wintershall will increase its crude oil and natural gas production to 140 barrels of oil equivalent by 2010. In the same period sales of natural gas are to be fur-ther increased to at least 40 billion cubic meters.
1 The figure stated for profit from operating activities is before income taxes on crude oil production in North Africa and the Middle East.
2 IFRS reporting since 2005. Figures correspond to those reported for the BASF Group’s Oil and Gas Segment.
Wintershall is a wholly-owned subsidiary of BASF Aktiengesellschaft in Ludwigshafen. The company has been active in the exploration and production of crude oil and natural gas for over 75 years. Today, the company is Germany's largest crude oil and natural gas producer.
Wintershall. Shaping the future.
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Forward-looking statements and forecasts
This release contains forward-looking statements under the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on current expecta-tions, estimates and projections of the board of executive directors and currently available information. They are not guarantees of future performance, involve cer-tain risks and uncertainties that are difficult to predict and are based upon assump-tions as to future events that may not prove to be accurate. Many factors could cause the actual results, performance or achievements to be materially different from those that may be expressed or implied by such statements. Such factors include those discussed in BASF’s Form 20-F filed with the Securities and Exchange Commission. We do not assume any obligation to update the forward-looking statements contained in this release.