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OMV enjoys summer of exploration and discoveries

It's been a good summer for OMV and its strategy to move away from the lower-margin downstream sector to focus on the more profitable upstream

On 6 September, OMV announced it had discovered sizeable oil and natural gas deposits in PL 537, a largely unexplored part of the Barents Sea, offshore Norway.

Preliminary estimates, OMV said, put the size of the discovery for the drilled segment at between 60 million and 160m barrels of recoverable oil, and 10 billion to 40bn cubic feet (cf) of recoverable gas. "Considering equivalent segments, immediately adjacent to the first one, recoverable oil volumes for the [licence] PL are seen in a size order of 200 to 500m [barrels of oil equivalent]," the company said in a statement.

OMV is the operator of the block and owns 25% of the licence. The UK independent Tullow Oil owns 20%, Statoil of Norway 15%, and two smaller Norwegian operators control the remainder.

Jaap Huijskes, who is responsible for OMV's exploration and production, said the discovery would "significantly contribute to OMV's long-term organic growth in Northern Europe" - part of a wider effort to beef up its exposure to northern Europe.

As such, it dovetails with the deal struck just a month previously in which OMV bought minority stakes in several North Sea oilfields from Statoil for $2.65bn. Statoil sold minority stakes in Gullfaks, Gudrun, Rosebank and Schiehallion. The company also agreed optional cooperation in 11 of Statoil's licences in the Norwegian North Sea, West of Shetland and the Faroe Islands.

Expansion plans

This deal will increase OMV's reserves and strengthen its presence in the OECD's producing nations. OMV's proven and probable reserves will rise by around 320m barrels of oil equivalent (boe) from the current levels of around 1.7bn boe. Production is set to rise by around 40,000 boe/d by 2014, with a target increase of roughly 58,000 boe/d by 2016. That puts it on track to meet its 2016 target of lifting production to around 400,000 boe/d from the production rate of 299,000 boe/d achieved in the first half of 2013.

As such, UBS analysts described the deal as "transformational" for OMV and, says Tamas Pletser of Erste Group, should determine "the exploration path for the next decade". Such a change, though, certainly didn't come cheap.

The transaction implies a 2P reserve valuation of $8.28/boe. By contrast, in a recent discovery on the Gullfaks licence, OMV has agreed to pay $6/boe for the additional reserves on this discovery to Statoil after the development.

Wood Mackenzie estimates the value of the North Sea assets at around $2bn. The difference between that and the $2.65bn OMV paid can be explained by different oil price scenarios: while OMV is using $100/b assumption for a long-term crude oil price, others use a price of $90-95/b, in line with the forward curve, which puts the end-2016 Brent forward price is put at $92/b.

Helping justify the premium that OMV paid are the potential benefits of teaming up with Statoil. "For OMV, the transaction means an expansion of its activity in the wider North Sea area, along with a fruitful partnership that is likely to see Statoil share expertise on how to make the most of a relatively mature basin," says IHS Global Insight.

As part of its swim upstream, OMV is getting to work in the Black Sea.  On 25 June, OMV's Romanian subsidiary Petrom and its joint venture partner ExxonMobil announced the completion of 3-D seismic at the Neptun Deep Block, covering more than 6,000 square km. The survey is part of a $1bn exploration programme to assess the 2012 Domino gas discovery, which OMV reckons could contain reserves of between 42bn and 84bn cubic metres (cm) of gas.

Elsewhere in the Black Sea, the Ukrainian government said it plans by the end of September to sign a production sharing agreement with a consortium that includes OMV to develop the Skifske gasfield. Skifske could produce 4bn cm/y of gas, the government estimates, requiring an investment of about $12bn.

OMV is also starting a 3D seismic survey at the 1-21 Han-Asparuh Block in the Black Sea offshore Bulgaria, which will help to define the drilling locations for two exploration wells. In addition, OMV and the Abu Dhabi National Oil Company signed an exploration agreement that will see the companies jointly explore onshore Abu Dhabi.

Although less than 10% of OMV's production in 2012 came from the Middle East and Caspian Sea region in 2012, Roiss said the reduction of its exposure to these areas is "an important dimension". OMV has been plagued by stoppages at its Yemen and Libya operations. On 6 September, the company halted production in Libya as protests by oilfield workers and security guards spread.

Libyan unrest has had a big impact on the company's results. In August, OMV revealed production in the second quarter fell 2.6% to 297,000 boe/d, which contributed to profits in the quarter dropping 29% to €321m ($426.6m). The results also exposed other weaknesses in OMV's business. Its gas and power unit moved into a loss of €30m, caused by its Econgas gas trading outfit which is suffering from loss-making, long-term, oil-linked gas supply contracts. The company said on 12 August it was in "intensive" negotiations with Russia's Gazprom and Norway's Statoil over adjusting these contracts.

OMV also wrote down €55m in the second quarter as the curtain came down on the Nabucco pipeline project. Following Roiss' announcement that "the Nabucco project is over for us", OMV's stock rose 9.5% to €36.465 - a level around which it's still trading today, making it one of the best performers in the Bloomberg European Energy Index this year.

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