In a wide-ranging interview with Critical Resource, Alex Schneiter – CEO of Lundin Petroleum – sees prices bottoming out and predicts that companies which invest now will reap benefits in the long term.
The damage is done – the question is how fast the recovery will be
“High and stable prices during the period 2011-2014 led to significant amounts of investment in the oil industry. Everyone felt like it was a new era in which the oil price would never go below $90 per barrel. Because of that, companies invested at times in projects that were perhaps not the best in the world. Then, despite demand remaining strong, the shale revolution in the US and OPEC’s desire to retain market share left the market oversupplied triggering significant underinvestment. In January 2016, Wood Mackenzie estimated that there was $380bn of deferred capital expenditure in the sector.
Now we’re finding that most unconventional oil and gas is not economic at $40 prices. US production has run down and slowly but surely supply is balancing out with demand. When that happens the industry will be able to recover from two years of underinvestment. The oil price can only go up, regardless of what OPEC does. The damage is done. The question is how fast the recovery will be.
Lundin Petroleum will remain competitive even if the oil price stays lower for longer. Our Johan Sverdrup field is probably one of the few assets in the world that breaks even below $30/bbl. Across the industry, the break-even point is generally in the $50-60/bbl range. In a low-price environment you really have to focus on what is important to the company and its stakeholders.”
In tough times, those who walk the talk get ahead
“Our relationship with stakeholders has improved during the downturn. At a time when people are pulling out or being shy in spending exploration money we are showing that we can continue to invest. In the Barents Sea for example, we will be one of the few companies this year exploring and appraising. That has strengthened our relationship with governments, particularly in Norway where more than 80% of our business is based. We have also improved our relationship with nearby communities by continuing to provide employment during a period in which people are otherwise losing jobs. In tough times, whoever walks the talk gets the most credibility.
We’ve also been able to take advantage of low prices for rigs and labour. So there have been many opportunities amid the slump – but you have to be able to seize them. Unfortunately when things go bad, a lot of people simply cannot invest. They’re just in survival mode.
The start of my tenure as CEO was more or less coincidental with the free-fall in oil prices. Our relationships with some of our partners were tested during that period. Despite the circumstances, we were able to refinance the company at a time when prices were at $27. The strength and low cost of our assets has been a blessing during the downturn. Johan Sverdrup and Edvard Grieg have operating costs in the region of about $5 and $7 per barrel.”
Opportunities remain in areas the world has turned its back on
“Sometimes the world turns its back on mature areas that it thinks have been used up. We are quite contrarian in that we’ll explore in those areas where others have given up. With that attitude we discovered Johan Sverdrup, one of the largest oil fields in the world.
We’re also producing in the middle of the Champagne region in France. Companies there have to have excellent HSE standards and be extremely careful in order to be able to extract oil in an area that produces some of the world’s best wine and champagne.”
A different kind of Arctic
“There is some discussion about our activity in the Southern Barents Sea because it is considered the Arctic. But there’s Arctic and then there’s ‘Arctic’. We’re exploring at around 72 degrees latitude. That’s about the same latitude as offshore exploration in Alaska. But in Alaska the winter averages about -25°C compared to about 0°C in the Barents. We have no ice, while in Alaska there’s plenty of it. The southern Barents is blessed with the Gulf Stream which keeps temperatures down. It’s a completely different environment.
The Norwegian government wants to see the area developed. Communities are also eager for the project to develop quickly. They’re more marginalised than other parts of Norway and want us to develop the project faster than we’re able to. So far we haven’t seen much NGO opposition. They’re much more focused on areas where there is ice or difficult conditions.”
Tackling climate change is a shared responsibility
“We certainly feel that we do our share to mitigate CO2 emissions. Every person has to accept his or her own responsibility to address climate change. As a company, our objective is to produce each barrel in the most efficient possible way. Consumers have to have the same mentality. It’s a shared responsibility.
While climate change is an important issue we’re not very concerned about the ‘stranded assets’ debate. We track it as an issue but it’s not a top priority among our stakeholders. We’ve been focused on reducing our operational emissions, and have been doing so since before the Paris Agreement. Johan Sverdrup will soon be a 100% electrified platform. That will reduce the project’s CO2 emissions by 80%. Edvard Grieg is also built to accommodate electrification later in its life. It is designed with waste-heat recovery and other energy efficient technologies. Energy efficiency is built into everything we do.
Norway is the world champion in terms of efficiency because strict environmental regulations require companies to keep emissions low. For example, companies have to pay taxes on CO2 emissions. In Norway, for every barrel you extract your CO2 emissions are several times lower than in other parts of Europe and the US. Carbon intensity in Norway is about 6.9 CO2e/tonne whereas the industry average is about 19 CO2e/tonne.”