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Wintershall and DEA: A merger with ‘major’ aspirations

The Wintershall and DEA merger, the largest upstream deal in Europe for over a decade, will be heavily weighted to gas, putting it at the centre of a heated gas debate in Germany

Wintershall chief executive Mario Mehren likes to speak his mind, especially when it comes to the role of natural gas in Germany's energy transition, the vaunted Energiewende.

At the company's annual results presentation earlier this year, he stressed the urgent need for Germany to switch from coal to natural gas in electricity generation. Since then, a government commission has been formed to deliberate the phase-out of coal-fired generation; it's expected to report before the end of the year.

So, what outcome would Mehren like to see? And what would such an outcome mean for Wintershall?

"Germany's energy transition—celebrated a few years ago as an international flagship project—has lost its way," he said in an interview with Petroleum Economist. "The self-imposed climate targets for 2020 will clearly be missed. If Germany doesn't find a socially acceptable exit from coal-fired power generation in a timely manner, the goals set for 2030 will not be achieved."

Mehren added that it was "important and right that the Commission on Growth, Structural Change and Employment is currently drawing up a plan for phasing out coal-fired power generation. And it's also important and right that, in addition to the necessary reduction in carbon, two other goals are also being focused on: securing energy supplies and ensuring the social compatibility of structural change."

The Wintershall boss added that "a future energy supply is only truly sustainable if it's environmentally friendly, economically viable and socially acceptable, to equal extents".

Goodbye coal, hello gas

Mehren has good reasons to want to see the back of coal in electricity generation. Not only have Germany's greenhouse gas (GHG) emissions barely changed over the past decade—despite the many billions of euros poured into renewables investment in the name of the Energiewende—but the company he heads is a major producer, transporter and seller of natural gas.

Nuclear power in Germany is due to be shut down by 2022, and pressure is building to cut GHG emissions in the wake of the Paris Agreement on climate change. One consequence is a growing consensus that gas will need to play a much greater role than it has in recent years, to fill the gap left by nuclear and coal, and to back up variable renewables.

Whatever exit plan is established by the structural change commission, Mehren insists "it must be reliable and binding in order to provide investment and planning security" so that sufficient gas supply can be secured. "This means that coal-fired power plants must be removed from the grid once and for all," he said. "Future reactivation, for example for increasing capacity reserves, should be excluded."

Mehren is certain that "to chart a successful course into a green future, Germany needs natural gas—as a natural partner for renewables. That's exactly what the idea of the energy transition was originally: replacing both nuclear power and coal with renewables and gas."

Focus on Russia

Wintershall sees itself as an international oil and gas company. It has operations in South America, North Africa and the Middle East. Its North African interests will be extended when it completes its proposed merger with another German upstream company, DEA, probably in 2019 (see box).

That said, the combined Wintershall DEA will remain primarily a European company, with its headquarters in Germany and much of its production, heavily weighted towards gas, in Russia. In 2017, 70% of Wintershall's production was gas and more than half of its hydrocarbons production was in Russia, most of that gas.

The transaction agreement for the merger was signed at the end of September, but remains subject to approvals by the relevant authorities. Meanwhile, Wintershall and DEA continue to operate as separate companies. The approvals process will be complex, partly because Wintershall owns a sizeable gas transportation business within Germany.

"The closing conditions include approvals of merger control authorities and clearance under foreign investment regulations," Mehren said. "In addition, approvals of several mining authorities and the German Federal Network Agency—with respect to Wintershall's gas transportation business—are necessary."

There are questions surrounding the issue of a partly Russian-owned entity owning European assets, but Mehren doesn't see this as a stumbling block: "There are no reasons to be concerned since the midstream assets owned by Wintershall, together with our partner Gazprom in Germany, are under full supervision of the German Federal Network Agency, which—as I've mentioned—will also be involved in the approval process."

Given the importance of Wintershall's investments in Russia, how worried is he that deteriorating relations between Russia, on the one side, and Europe and the US, on the other, might have a material impact? "Wintershall has longstanding and trustful business relationships with Russian companies or companies being owned by Russian citizens," Mehren said. "Given the current legal and factual situation, these relationships are not directly affected by any sanctions, including US sanctions. Of course, we are monitoring the development closely and constantly."

Nord Stream 2

Another controversy that merits close and constant monitoring surrounds Nord Stream 2, the 55bn-cubic-metres-a-year expansion of the Nord Stream gas pipeline that connects Russia and Germany directly, controversially circumventing export routes through Ukraine and Poland.

"Wintershall is contributing to the financing of the Nord Stream 2 project as a co-creditor," said Mehren. For while Gazprom is the sole shareholder of the project company—Nord Stream 2 AG—five European companies are involved in financing half of the €9.5bn ($11bn) investment needed for the project, in equal parts: Engie, OMV, Shell, Uniper and Wintershall.

Mehren is adamant that the project is vital to European gas supply security: "The implementation of Nord Stream 2 will strengthen infrastructure and security of supply in Europe, which is particularly important given the decline in production there. Nord Stream 2 is essential for giving European customers, especially industrial customers, access to competitively priced gas."

The project company, Nord Stream 2 AG, the Wintershall chief executive added, "has published the fact that construction permits from authorities of all states involved in the project, apart from Denmark, have been received. In Denmark, the project company has suggested an alternative route outside of the Danish territorial waters."

Construction work in German and Finnish territorial waters is under way, with approximately 100km (62 miles) completed so far. "We are confident," Mehren said, "that Nord Stream 2 will become operational by 1 January, 2020."

Nevertheless, the politics surrounding the project remain unpredictable, not least because of opposition from the US president Donald Trump, who would like to see large volumes of US liquefied natural gas going into Europe.

Controversies aside, Mehren can point to significant achievements for the company he heads. Between 2011 and 2016, hydrocarbons production grew by around 50%. It fell by a whisker in 2017, but is expected to show further grow this year with the commissioning of new projects.

One such project is the Maria development in Norway, which came on stream last December, almost a year early and with costs a fifth under budget, at around €1.2bn. Maria is the first project in Norway that Wintershall has led through the entire development process, from field exploration to the start of production. The company's production in Norway is already at about 100,000 barrels of oil equivalent a day, and a number of other projects are in the pipeline.

Aasta Hansteen is progressing faster than anticipated and with lower costs, and the plan for development and operation for the Nova field was approved by the Ministry of Petroleum and Energy at the start of October. It will be developed as a sub-sea tie-back connecting two templates to the Gjøa platform for processing and export.

In Russia—which Mehren says "will remain the most important region for Wintershall"—gas production in Block 1A of the Achimov formation in the Urengoy field rose to 6.6bn cubic metres in 2017. The joint venture with Gazprom produces from 88 wells and by 2020 the plan is to increase the number to 110. Wintershall is working on launching the development of Blocks 4A and 5A of the field, which hold 274bn cubic metres of gas.

At the end of 2017, Gazprom and Wintershall celebrated the 10-year production anniversary of the shared Yuzhno Russkoye project, which has been producing at a plateau of 25bn cubic metres a year since 2009.

Latin America expansion

In Argentina, where it has been active for four decades, Wintershall is the fourth-largest producer of natural gas, active in 15 onshore and offshore fields—two of them as operator. The emphasis today is on developing unconventional oil and gas in the promising Vaca Muerta formation. "Our shale oil pilot project in Aguada Federal has been operational since 2015," said Mehren, "and in Bandurria Norte we drilled three horizontal pilot wells in 2017."

The company has also expanded its operations into Brazil, where earlier this year it was awarded seven offshore exploration licences in the 15 th oil and gas licensing round, and will hold the operatorship for four of them. They are located off the north and south-east coasts.

Overall, the company's upstream performance has been impressive. "With production costs of $9/boe on average, we are almost 50% below the industry average," Mehren said. "We are also a leading competitor when it comes to replacement costs. We only need $10 a barrel for new reserves over a five-year average. Our competitors require three times as much on average." The reserves replacement rate in 2017 was 133%.

COP 24 question mark

As 2018 draws to a close, Mehren's attention will once again turn to the issue of climate change. Germany's structural change commission is preparing to report its deliberations on the proposed exit from coal in electricity generation, and the next round of UN climate talks, COP 24, being held in December in the Polish city of Katowice.

Despite all the hullabaloo surrounding the Paris Agreement, it's far from being a done deal. Negotiators have been working frantically on preparing the detailed rulebook that will govern its implementation and the deadline for completion of that process will be COP 24. The sense of urgency will be heightened by the recent publication by the Intergovernmental Panel on Climate Change of its special 1.5°C report in October. How concerned is Mehren about the success of COP24?

"The global population is growing, and with it the urgent need for energy," he said. "At the same time, climate change is one of the biggest challenges facing humanity. We must make every effort to reduce the emissions of CO 2. At Wintershall, and in the future at Wintershall DEA, we are very much committed to the Paris climate goals. Looking ahead and finding realistic energy scenarios for the world's growing demand will also be the focus this December in Katowice. There is a lot at stake in Katowice. If the climate treaty fails, that would be bad news."

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