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Saturday, October 21 2017 @ 05:27 PM AST

Robust outlook for Norway Offshore Markets - Morgan Stanley

Norway is generally regarded as a mature province, but recent exploration success and development efforts are driving an improving production outlook, Morgan Stanley Research (Europe) said in a report this month. "Norway is generally regarded as a mature province, but recent exploration success and development efforts are driving an improving production outlook. We see positive implications for the Norwegian seismic, rig, and subsea markets," the authors said. The Morgan Stanley Research (Europe) team said: "We spent a day in Oslo meeting CEO Jon Erik Reinhardsen of PGS (at right), Tim Crome and Odd Stroemsnes of Technip, CFO Leif Borge of Aker Solutions, CFO Kristian Johansen of TGS-NOPEC and SVP Jon Arnt Jacobsen of Statoil. The overall takeaway was of a positive tightening in the offshore and seismic segments of the market with a robust demand outlook."

CEO Jon Erik Reinhardsen remained upbeat on the seismic market and exploration cycle. The company is expecting low double-digit growth in 2013 of seismic activity by volume (square kilometers). Jon Erik highlighted that larger vessels on average with the recent move to much larger surveys was more than offsetting the higher vessel costs to the industry. The result is that the cost of seismic per square kilometer is remaining relatively constant, in contrast to other segments of oil services where cost inflation is already seeping back into the system. This is in turn leading to more seismic spending to minimize the risks of unsuccessful exploration wells, where costs continue to rise for the industry.

Odd Stroemsnes, Managing Director of Technip in Norway, and Tim Crome, Director of Sales & Business Development in Norway, were upbeat regarding the outlook for the Norwegian offshore market overall and how the evolving nature of the market would benefit Technip.

CFO Leif Borge summarized the evolution of AKSO as moving away from being a project company to one more focused on products. As part of this, the company highlighted the requirement to resolve the group level processes and organization, rather than just improving small aspects of the business. The overall focus of management is to lower the capital employed and improve profitability to drive returns higher from both ends.

CFO Kristian Johansen outlined a positive outlook for the demand for seismic data. Recent exploration successes are maintaining a high level of excitement in the industry, particularly in frontier areas. The report said: "The company was equally upbeat on reservoir monitoring seismic, including its optics solution (similar to PGS). Despite fewer licensing rounds in 2013 than 2012, the company remains upbeat on multi-client sales, and we continue to see upside risk to Fiscal Year 2013 guidance."

Statoil: Lessons from the annual report

Looking at Statoil's recently released annual report, Morgan Stanley Research said that Statoil’s organic reserve replacement continued to improve in 2012. Also, both finding and unit development costs decreased in 2012, unlike the increases seen at BP, Shell, Total and Repsol. However, developed reserve life fell to a record low in 2012. Upstream operating margins also declined, owing to higher depreciation, depletion and amortization (DD&A) and exploration expenses.

Four key observations

1) Statoil continued the upward trend in organic reserves bookings in 2012: Statoil posted an organic reserve replacement rate (ORR) of 110% in 2012, up from 101% in 2011 and 85% in 2010. Similar to the trend seen in 2011, this was driven primarily by the additions in oil reserves. The ORR in oil, natural gas liquids (NGL) and bitumen reserves was a strong 137% in 2012, up from 129% in 2011.



2) Unlike peers, both finding and unit development (F&D) costs declined in 2012: Of the European majors that have reported F&D costs so far (BP , Shell, Total, Statoil and Repsol), Statoil is the only one to report a fall in both finding and unit development costs in 2012. Statoil’s finding costs in 2012 were US$6.4 per barrel of oil equivalent (boe), down 58% from US$14.9/boe in 2011. The company’s unit development cost also decreased in 2012, albeit by a smaller proportion; 2012 unit development cost was US$27.0 per barrel (bbl) compared to US$27.8/bbl in 2011. We note that the finding cost decreased by a much lower rate of 24% when compared to 2010. Unit development costs increased by ~50% over the same period.



3) Developed 1P reserve (proven reserves which is = both proved developed reserves + proved undeveloped reserves) life is currently the lowest since 2007: Despite costs remaining under control, we note that Statoil’s developed reserve life continued to decrease in 2012 to 5.6 years, the lowest it has been since 2007. This highlights the need for Statoil to deliver on its large future project pipeline in order to grow developed reserve life.



4) Production costs under control, but higher DD&A reduced profitability: Statoil’s production costs in 2012 remained largely under control, with production costs/boe increasing by only 2% year on year in 2012. However, a large year on year increase in DD&A (+18%) and exploration expenses (+20%) placed downward pressure on the company’s upstream operating margin. Operating income per barrel fell 10% despite liquids realisations increasing by 1.6% in 2012. We note the 2011 operating profit was boosted by increased revenue contribution from Americas, where the company reported 13.8 billion Norwegian Krones as ‘other revenue’.



At a regional level, DD&A/boe for Norway decreased year on year in 2012, while that of Africa and Americas increased significantly – by 43% and 53% respectively, compared to 2011.

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