Lundin Petroleum discovered the 2.7 billion barrel Johan Sverdrup oil field in 2010. CEO Alex Schneiter spoke to Nick Coleman shortly before first oil was produced in early October, about the company’s strategy, the challenges for small exploration and production firms, and how the sector can respond to changing societal and environmental demands.
What does the startup of the Johan Sverdrup oil field mean for Lundin and Norway’s oil and gas industry?
It’s tremendous on all counts. Johan Sverdrup is transformational for Lundin Petroleum. If you go a little bit back in history, to 2015, Lundin Petroleum was producing about 20,000 boe/d, we quadrupled our production mainly through a field we discovered [in 2007] called Edvard Grieg, which was an important field because it gave us the key to discover later on Johan Sverdrup in 2010.
Watch the full Insight Conversation video interview with Alex Schneiter
Edvard Grieg [which came on stream in 2015] was instrumental for the growth of the company and of cash flow, but Johan Sverdrup is going to be the field that will allow us in essence to almost double again our production. We are close to 50% under budget. Johan Sverdrup will really provide the next transformational growth of the company. It is a phenomenal field and phenomenal for Norway also. Johan Sverdrup will generate NOK900 billion [$100 billion] of tax revenue and it will be a large part of the oil production in the Norwegian Continental Shelf and by far the largest field in both the North Sea UK and Norway together.
Are the days numbered for small, focused exploration companies?
We continue to say that our main strategy is organic growth. We want to continue to grow through the drill bit with our ability to discover new resources. We have other projects in the pipeline and our objective is not to just sit on Johan Sverdrup. We will continue to explore and we certainly believe the Norwegian Continental Shelf has some extraordinary potential so we’re there to stay, and to continue to explore.
Did the collapse of the oil price in 2014 force companies like yours to have more production and get their debt levels down?
For Lundin the downturn was an opportunity. We’ve always been a very efficient organisation in terms of cost, so when the downturn came, for us actually it was business as usual. We took the opportunity of lower rig rates, cheaper seismic, to expand our position in the Norwegian Continental Shelf. Just in the last two years we’ve increased our acreage position in Norway by almost 60% and we’re drilling now more exploration wells as a result of that investment than we did before. The downturn is a tough time for oil companies, but it’s also an opportunity and certainly for us was an opportunity.
What’s the key to exploration success in Norway?
It’s a lot of work. You have to have a clear strategy, you have to have obviously an excellent team of people, and you have to have a critical mass. The ingredient for us in the Norwegian Continental Shelf has been an excellent team of people, it’s a very flat management structure that has allowed us to be directly in contact with the sub-surface people and it may have been of help that the CEO comes from the background of sub-surface. Exploration can be quite tough and you have ups and downs and you have to persevere and then success comes.
On the Arctic, how equipped is Norway really for an expansion into the Arctic – not so much the technology, but the social, societal, political environment?
It’s happening [with fields such as Goliat] and Equinor making a large discovery, half a billion barrels, called Johan Castberg… ourselves with Alta-Gohta. Norway is well equipped. We have to be specific: it’s Arctic, but it’s ice-free Arctic, its relatively shallow water, a benign environment. The regulation in Norway is probably the most stringent in the world so Norway is very well equipped to explore in such an area. It’s a very prospective area. If you have the right approach and you’re very careful – we’re all very conscious about the environment and everybody wants to do the best and under the regulation of Norway – it’s a place in my view that is totally viable, and its’ something we can explain to the larger public.
Is your message sufficient to persuade environmental critics, given we’ve seen protesters board a BP rig in the UK North Sea?
If I have a message to environmentalists such as Greenpeace, my belief is there is an energy transition, oil and gas has a role to play in that energy transition, I would say look at what Norway’s doing, what they’ve done successfully in trying to reduce their carbon footprint. If you’re an environmentalist you should say, please, do more in Norway, and perhaps less in other countries which have got less regulation and which have got a carbon footprint which is far more damaging. So that would be perhaps a better dialogue between business and environmentalists.
There’s a lot of talk in the industry about reducing emissions from the oil field produced for electricity, light, energy for driving drilling rigs, with Johan Sverdrup you’re going to have power from the Norwegian grid. But is that applicable to every small oil and gas accumulation?
Every oil company now has to look very carefully at how best to produce the barrel. The saving in Johan Sverdrup platform in one year by using onshore electricity mainly from hydropower, it’s an equivalent of 410,000 private cars per year. Will that work everywhere, probably not, but there are other solutions. Equinor as we speak are looking at installing wind power around their platforms in Norway. This could be used in Canada and other places. Every country will have to look at solutions based on their natural resources. For Johan Sverdrup it’s been a phenomenal achievement and probably one of the lowest carbon footprints in the offshore industry.
Production from other fields has mostly been declining. Is Norway’s industry set up in the most optimal way, does Equinor need to be privatized? Does there need to be structural change?
There has been a structural change if you go back to 2000. At that time the Norwegian Continental Shelf was really under the control of five or six majors and no small independents like Lundin were present. In 2000 they made the first step to change that and allow smaller companies to come into the Norwegian Continental Shelf. That was followed by a fiscal change which was the refund, the 78% refund of any exploration spend, so for every dollar you spend you get back 67 cents. That has definitely accelerated exploration.
The environment in Norway to explore for new resources is there. Now are we doing enough? Probably not. We’re still suffering from the downturn, there are fewer companies prepared to dedicate enough spending on capex for exploration and the Norwegian continental shelf needs new discoveries. After Johan Sverdrup and maybe Johan Castberg later on, but on a much smaller scale, there are no other fields of large size to be developed, so something needs to happen otherwise beyond Johan Sverdrup there’s going to be decline, that’s for sure. It’s one thing to buy barrels, you’re just shifting from one hand to the other, but you also need people that want to explore.
Will the rise of mid-sized players change the equation?
There are more and more players through M&A. The Norwegians always wanted diversification, they always wanted more competitors and they are achieving that.
What are your operating costs per barrel?
We are close to $4/boe. We’re guiding the market that post-Johan Sverdrup for the next eight years we will have operating costs between $3.4 and 4.4/boe. Johan Sverdrup, the field itself, is less than $2/boe, which you could say is competitive with the Middle East.
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