Wintershall ideally positioned to withstand increasing global competition
Production in Yuzhno Russkoye successful
Reserves significantly increased
Natural gas trading continues on growth course
Berlin / Kassel. Rising costs, the growing tendency to nationalize energy reserves and the increasingly demanding technical requirements of production areas – the independent international oil and gas producers are facing intense pressure. In addition to the mounting competition for new sources of energy, gaining access to new reserves is the biggest challenge they face. “Wintershall is ideally positioned to withstand these extremely challenging conditions. 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. It is the key to our success,” Reinier Zwitserloot, Chairman of the Board of Executive Directors of Wintershall Holding AG, said on Wednesday at the company’s annual press event in Berlin. Many large oil and gas companies are complaining of falling production quantities and are experiencing difficulties replenishing their reserves. But wholly owned BASF subsidiary Wintershall even increased production slightly in 2007 and built up its reserves substantially. Production from the Yuzhno Russkoye field in Siberia which began at the end of last year is developing very successfully. 35 million cubic meters of gas per day are already being produced from 63 wells. “We will already reach the maximum total production of 25 billion cubic meters of gas per year in 2009 two years earlier than planned,” Mr. Zwitserloot explained. At this level, the Yuzhno Russkoye deposit can cover Russia’s gas exports from Russia to Germany for another 15 years.
Competitive advantage secured through strategic partnerships
the national companies of oil producing countries. This shift of power from the international producers to the national oil companies has put the entire industry under pressure. Wintershall is an accepted and popular partner – in Russia, Qatar and Norway, amongst others – by state companies and international firms alike. “What’s more, we know how to develop these partnerships. That gives us a competitive advantage,” the Chairman of the Board of Wintershall said. “We will also continue to promote our technical expertise, which is a key element of these partnerships.” The combination of stateoftheart technology and proven methods of developing increasingly complex deposits – that is the strength that Wintershall is building on. ”Our skills will still be soughtafter and welcome in the mounting global competition,” Mr. Zwitserloot commented.
In 2007 Wintershall even managed to raise production of crude oil and natural gas slightly above the high level of 2006 to 112 million barrels oil equivalent. Moreover, 389 percent of the volumes produced in 2007 were replenished. “We owe this to our participation in the large Siberian gas field Yuzhno Russkoye,” Mr. Zwitserloot explained.
The successful completion of the assets swap between Gazprom and Wintershall in 2007 is a prime example of partnership in action. “Yuzhno Russkoye is not just a Russian gas field. Rather, 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," Mr. Zwitserloot noted. The wholly owned BASF subsidiary has a 35 percent interest in the economic success of the Yuzhno Russkoye natural gas field in Western Siberia.
External cost drivers in exploration and production
The global hunger for energy is growing undiminished. According to estimates by the International Energy Agency (IEA), global energy requirements will double by 2030. China and India alone will account for 45 percent of these additional requirements. The increasing global competition for oil and gas resources is generating higher demand for drilling equipment, services, materials and specialized personnel. “Even the rent for a drilling platform has doubled in the last two years across the entire industry,” Mr. Zwitserloot said. Wintershall, like all oil and gas producers, is confronted with rising costs. “Despite our constant improvements in efficiency in the way we use resources, we were not able to fully offset the external factors driving up costs in 2007."
In addition, last year’s oil price rises, which hit historic highs, did not benefit the company. As a German subsidiary of BASF, Wintershall completes its transactions in dollars but keeps its accounts in euros, which ultimately swallows up any increases in price for crude oil. Compared with the previous year, the average price for Brent crude oil, the benchmark oil price, rose by seven U.S. dollars a barrel (159 liters) to an average of 72 U.S. dollars a barrel. “But because of the weak dollar, the price calculated in euros in 2007 was not even one euro per barrel more than the price last year,” Mr. Zwitserloot explained. Gas prices did not develop the same way as oil prices: in fact, the sales revenue for gas produced from the North Sea was below the level of 2006.
Substantial increase in natural gas sales in Germany and abroad
In the second sector, natural gas trading, sales of the three trading ventures – (WINGAS, WIEE und WIEH), held jointly with OAO Gazprom – increased by five percent to 368.4 billion kilowatt hours (2006: 351) in the first quarter of 2007 despite the mild weather. WINGAS was responsible for 249.8 billion kilowatt hours (2006: 228.2) of this figure. The company continued to grow in Germany and abroad – contrary to the general market trend – and was able to increase sales by almost ten percent. As such, WINGAS recorded the highest natural gas sales in the company’s history in 2007. Market conditions for natural gas trading were also difficult in 2007. The high oil price led to higher purchase costs for natural gas, and these could only be passed on to customers with a time lag.
Fall in earnings due to rising costs and structural effects
As a result, Wintershall was not able to repeat the record figures of the previous year: in 20071 profit from operating activities2 fell to 3.01 billion euros (2006: 3.25), although Wintershall is still the segment with the strongest result in the BASF Group. Of this figure, 2.47 billion euros (2006: 2.65) was attributable to exploration and production and 544 million euros (2006: 605) came from natural gas trading. The difficult market conditions were equally detrimental to both segments.
Sales (net of natural gas taxes) to third parties fell slightly compared to the previous year by 2 percent to 10.5 billion euros. Of this, 6.1 billion euros came from natural gas trading and 4.4 billion euros from exploration and production.
Increased cooperation with Gazprom
Wintershall succeeded in driving forward important projects in Europe as part of its “Gas for Europe” strategy. As well as expanding production of the Yuzhno Russkoye gas field in Western Siberia, pilot production at Achimgaz is now planned. Wintershall’s technical expertise is called for here. “We have completed the six wells in the first project phase of the development of the extremely complex Achimov Formation of the West Siberian Urengoy field, and the first production tests fully meet our expectations,” Mr. Zwitserloot explained. Production is expected to start in the second quarter of 2008. Other exploration projects are also being pursued in the Caspian Sea region.
Wintershall is one of the largest gas producers in the southern section of the North Sea, where it operates 26 platforms with an annual production of more than two billion cubic meters. In 2007 the company set up one of the most modern platform control centers in the world in order to control 18 of these gas production platforms centrally from the mainland. A radio monitoring system will help ensure future commercial production of offshore reserves from the North Sea. In addition, we have acquired very promising interests in exploration licenses in the North Sea off the coast of Germany, the UK, the Netherlands and Norway. In the biggest ever crossborder seismic initiative in the North Sea, surveys were conducted over an area of about 2,300 square kilometers. Around half of the natural gas currently consumed in Europe comes from the countries bordering the North Sea – Norway, the Netherlands, Denmark, the UK and Germany.
Last year 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. Wintershall also stepped up its involvement in the Gulf region. In addition to the existing 51 percent stake in block 11 in Qatar’s territorial waters, Wintershall received a 40 percent share in the exploration rights in the adjacent block, block 3, in a bidding round.
In the area of natural gas trading, last year WINGAS once again demonstrated its enormous capacity for growth. The GermanRussian joint venture is one of the few companies, if not the only one, able to substantially increase its gas sales despite one of the warmest winters since the beginning of records. WINGAS is now supplying a variety of new customers in North RhineWestphalia, one of Germany’s most industrial and thus energyintensive regions. WINGAS also continued on its growth cause in other European countries. In Belgium and in the UK it even managed to acquire new customers and increase sales. In the spring of 2007 WINGAS took over StatoilHydro’s 50 percent share in HydroWingas, and now operates the former joint venture alone as WINGAS UK Ltd.
Regulatory conditions that promote supply security required
Last autumn Gazprom increased its share in WINGAS GmbH from 35 percent to just under 50 percent, thus underlining the strong partnership that the two companies enjoy. “Our cooperation with 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,” Mr. Zwitserloot explained. By extending this partnership we are in an excellent position to cope with the everincreasing competition. Europe’s gas supply can only be ensured by cooperating with the few producing countries on the basis of equal partnerships. With shared investments along the entire value creation chain from the borehole to the end customer, we can share risks and ensure supply security.
But under the guise of market liberalization, EU policy is calling for increasingly strict regulatory measures. Producers and dealers who have already invested billions in the construction of the European infrastructure are being expected to give up their ownership of the infrastructure or agree to forced regulation by a central network operator. And that’s not all: instead of promoting the required partnerships, the socalled “antiGazprom” reciprocity clause – which excludes producers as potential investors – is the peak of delusion and a danger to Europe’s supply security,” Mr. Zwitserloot commented. ”We do not believe the 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”. This would be an efficient addition to the existing directives, which should first be implemented EUwide. “The EU is well advised to give this alternative serious consideration.”
“Hot air from Brussels certainly won’t keep the cold winter weather from European living rooms! We expect firm commitments and stable regulatory conditions from policy makers so that we can make major investments in this business in future as well,” the Chairman of the Wintershall Board of Executive Directors explained. These are needed in order to meet Europe’s growing demand for gas, accompanied by import dependency, in the future, too, and to secure the 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,” Mr. Zwitserloot explained.
Expanding the infrastructure in cooperation with Gazprom
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 and thus ensure Europe’s supply security. Nord Stream AG, in which Wintershall has a 24.5 percent stake, has initiated the approval process and extensive environmental assessments necessary for this project. Contracts for the pipes have been concluded with suppliers and installation capacity has been secured. When Dutch company Nederlandse Gasunie joins the Nord Stream project as planned, it will receive a nine percent stake, and Wintershall’s share will decrease by 4.5 percent to 20 percent.
“And the Nord Stream pipeline is coming because we really need it,” the Chairman of the Wintershall Board of Executive Directors said, pointing out that in 2020 the EU will need 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.”
With the regional impact assessment procedure for the onshore connection (OPAL) to the Nord Stream pipeline now successfully completed in two German federal states, the documents for the subsequent planning approval process were then submitted.
In addition, 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 – and will provide more supply security in Europe. In the next few years, a new natural gas storage facility is also planned for Jemgum near Leer in North Germany. WINGAS is cooperating with EWE AG (Oldenburg) for the planning and authorization process for the cavern storage facility. Furthermore, a storage facility in the United Kingdom (Saltfleetby) is in the planning stage.
The BASF subsidiary is expecting a substantial increase in natural gas production due to its participation in Yuzhno Russkoye. Despite the fall in crude oil production, it is expected that the original target for 2010, to increase the production of crude oil and natural gas in the first decade of this millennium by 50 percent to 120 million barrels of oil equivalent, will be reached this year. Consequently, the company has set itself a new target for 2010 – 140 million barrels of oil equivalent.
The company also intends to step up its 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. With higher production, higher gas turnover and high prices, the company aims to increase sales continuously so that earnings can once again make a substantial contribution to the BASF Group result.
Wintershall is a wholly-owned subsidiary of BASF in Ludwigshafen. The company has been active in the exploration and production of crude oil and natural gas for over 75 years. The company is now Germany’s largest producer of crude oil and natural gas and with its subsidiary, WINGAS, it is also an important gas supplier on the German and European market.
Wintershall. Shaping the future.
More information, background reports and photographic material on the annual press event are available on the Internet at www.wintershall.com.
Forwardlooking statements and forecasts
This report contains forwardlooking statements based on current expectations, assumptions and forecasts by the board of executive directors, as well as on the information currently available to that board. Forwardlooking statements are not deemed to be guarantees of the future developments and results set out therein. Future developments and results are in fact dependent on a large number of factors; they contain different risks and imponderables and are based on assumptions that may not be accurate. We do not assume any obligation to update the forwardlooking statements made in this document.