Lundin juggles ‘the best barrel’ with returns
The Norway-focused independent aims to reduce its carbon footprint while also keeping a smile on shareholders’ faces
The two strongest themes in the oil and gas investment world are ESG and delivering shareholder value. Both are increasingly a choke on capital flow—the first as investors shy away from both stranded assets and possible reputational risk, the latter the investment world’s kickback against sluggish share price performance.
Stockholm-headquartered Lundin Petroleum is aiming to prove that you can deliver a good ESG story and also strong returns. The firm’s CEO Alex Schneiter spoke to Petroleum Economist on the sidelines of the Oil & Gas Council’s World Energy Capital Assembly (WECA) in early December to discuss progress thus far.
Many oil and gas firms’ share price performance have been poor of late, but Lundin has delivered 60pc share price growth over the last three years. How have you achieved this?
Schneiter: Fundamentally, we are invested in fantastic fields. The Utsira High has been a great story for Lundin. We discovered both Edvard Grieg, which started production in late 2015, and Johan Sverdrup, which came on stream in October. Those two assets make up the majority of our cash flow today. These are therefore new facilities, which helps with efficiencies, as well as being very good reservoirs. But we still want to challenge ourselves, on a daily basis, on how can we get better in our operations. On digitalisation and automation, we are not trying to reinvent the wheel, but we are trying to use the best technology.
We are particularly conscious of the growing importance of ESG issues for oil and gas firms and we have invested over the last 10 years to try to produce the best barrel in the world. It is possible to both do this and to still generate great returns for your shareholders. Johan Sverdrup is fully electrified using onshore, mainly renewable power. We decided a month ago to fully electrify Edvard Grieg too. More than 80pc of Lundin’s assets will thus be fully electrified by 2022. And that means that we can not only produce barrels with very low operating costs—around $4/bl—we can also reduce our carbon footprint and still generate a really great return.
“We think you can develop oil in a very
sustainable way, and you can produce some of
the best barrels of oil in the world”
By 2022, our two main assets will generate a carbon footprint of less than one kg per barrel produced, 25 times less than the world average. In terms of ambitions to become carbon neutral, we will probably be one of the first companies that can achieve it because our emissions are so low. It is, of course, good to do your best environmentally but, if you do not also generate good returns, it is not sustainable. In 2015, we were producing 20,000bl/d oe, we quadrupled that to 80,000bl/d oe, with Edvard Grieg and now, with Johan Sverdrup, we are on a path to double that again. So, our growth has not been insignificant.
Lundin is very focused on growing through the drill bit, rather than through M&A. What motivates that strategy?
Schneiter: We believe in our ability to not only replace what we produce, but to find more. Over the last six years, we have had a replacement ratio of over 100% each year. Right now, we have eight projects, four of them already approved, in our post-Sverdrup pipeline, mainly nearfield discoveries. And it is much better, in the current ESG environment, to develop new fields with new technology than having more mature assets.
Our success so far is a combination of very knowledgeable people who understand Norway and understand the subsurface. And, secondly, the management team that supports them—I think it is easier in a smaller company, it is flatter structure, a geologist really has the ability to be heard by the senior management before going through a series of peer reviews that maybe then dilute ambitions.
But you need to walk that talk. It is one thing to have a great team and allow them to voice what they want to do. But then you have to invest the money, to believe in them and to make people accountable. If you look at our success in the Utsira High, it was all of this, plus technology. Our ability to improve subsurface imaging through new seismic technology helped us tremendously. And the technology will advance further, for example enhanced resolution, so you are going to see things that are more difficult to identify and that can lead to big discoveries. And you need to be in the right country—Norway has still got plenty of potential.
You are laser focused on core areas such as the Utsira High and Alvheim in the Norwegian North Sea and the Loppa High in the southern Barents Sea. Does this help?
Schneiter: Focus helps a lot. Before Lundin Petroleum, it was Lundin Oil, which was in various parts of the world. What we found was that it is very difficult to replicate everything everywhere. At some point, you really need to focus on a certain area where you genuinely think you have an advantage, and then really drive this to the maximum potential value. We were in many countries, but now Lundin Petroleum is just Norway. And that has helped us a lot.
On Norway, is it fair to say that public and political opinion is changing and becoming less pro-oil than previously?
Schneiter: Across Europe, green parties and policies are clearly growing in prominence and that is okay, as long as there is a good dialogue. Norway has shown to the world that if you put the right policies in place, it works. In the ’90s, Norway implemented its first CO₂ tax. And, globally, 20+ years later, we are still talking about whether we should implement a carbon tax. In Norway, we pay one of the highest CO₂ taxes in the world—if you put the certificate on top of the direct CO₂ tax, we pay more than $80/t CO₂e. And that has worked well in terms of a Norwegian oil and gas industry that has no flaring and very low emissions.
Government policy has incentivised the industry to do its best. If Europe now decides to implement a carbon tax, it would actually be a competitive advantage for us. And it shows you can do something like that and it does not erode an oil firm’s value. As I said, even in the Norwegian regulatory system, we have $4/bl operating costs today and over the next eight years we will stay between $3.40/bl and $4.40/bl. These are comparable to Middle East levels—Sverdrup itself will be less than $2/bl.
We are also aiming to generate close to $1bn of free cash flow on average and for a sustainable period of time and we will be one of the leading companies in the world in terms of CO₂e/ bl—and that is eminently achievable in Norway. Politics is politics. But if you look at organisations like the Petroleum Safety Authority and the Norwegian Petroleum Directorate, they really understand the business and they do a great job. While a lot of traditional oil firms are promoting a pivot to gas, 95pc of Lundin’s production is oil.
What is the driver there?
Schneiter: It just so happens that we have found a lot of oil. We are not against gas, of course. As we speak, we are looking to explore in areas that are gassy. If we find gas, we will develop gas. But we are not specifically saying, now we will just look for a gas. We think you can develop oil in a very sustainable way, and you can produce some of the best barrels of oil in the world. And it is not just about oil and gas producers; consuming industries, such as shipping and agriculture, also have a role to play.