Cover story: Resolute progress
O&GME travels to Kassel, Germany to attend the annual press conference of Wintershall. We speak to CEO Mario Mehren about the company's financial performance, its upstream activities around the world and its operations and plans in the MENA region
In Germany “there is a saying that there is no such thing as bad weather, it is just bad clothing,” Mario Mehren quipped during his speech at the annual press conference of Wintershall in the company’s headquarters in the city of Kassel. Indeed, Germany’s largest crude oil exploration & production (E&P) company, unlike most of its global peers, has been able to maintain buoyancy and even achieve growth during the most challenging stretch of the prevailing downturn in the oil and gas industry, if its financial results for 2016 is anything to go by.
Although profits fell sharply in 2016, owing to the slump in oil and gas prices and the asset swap with Russian major Gazprom which was completed last year, Wintershall still secured sales of €2.768mn (2015: €12.998mn) and earnings before interest and taxes (EBIT) before special items of €517mn (2015: €1.366mn). The activities divested to Gazprom contributed €10.1bn to sales and about €260mn to EBIT before special items in 2015. Overall, Wintershall generated a net income of €362mn in 2016.
Mehren, Wintershall’s chief executive and himself a German national, while addressing journalists gathered from countries where the company has active operations in during the press conference in March, attributed the impressive financial performance last year to a number of factors.
Eminent among those, the 46-year-old announced, were the company’s cost optimisation measures, intelligent investments and a diversified portfolio that includes oil and gas producing assets in Russia, Norway, the North Sea region (whose reserves-rich waters are shared by several European countries), Libya, a development project in Abu Dhabi, Argentina and of course in its home territory in Germany.
“Thanks to cost optimisation and the asset swap with Gazprom, we were able to reduce investments in the previous year by around €700mn,” Mehren, who has been leading Wintershall as CEO since only June 2015, said. “We have adapted successfully to the new business climate. The results, especially our continued positive free cash flow, show that the measures we have taken are working.”
On the other hand, despite reduced costs and investment expenses, Wintershall was able to raise its production by 12mn barrels of oil equivalent (BOE) in 2016 to a new record high of 165mn BOE – which implies that the company has increased its oil and gas output in the last decade by around 50%. The noteworthy rise in production volumes by almost 8% in 2016 came primarily from Norway and the Achimgaz joint venture in Russia.
At the same time, Wintershall – a subsidiary of BASF, the world’s largest chemicals company – has more than doubled its commercially recoverable oil and gas reserves in the last ten years from 814mn BOE to 1.62bn BOE.
Another astonishing fact that has helped Wintershall maintain profitability in recent times, including in the present tumultuous period for an E&P company, is its significantly low cost of production – an enviable average of $8 per barrel in the last four years, which is less than half of the average cost of production of its international competitors.
“That is of course an average that does not have too much meaning, because it compares production in very low-cost regions like Russia and Argentina with cost-intensive offshore North Sea production,” Mehren humbly tells me. “So you have $1 per barrel in one region to $12 or $13 in other areas. But our average is very, very low compared to our competitors whose average typically is twice as high. And this has to do with our (diversified) portfolio,” he comments.
A combination of the positive financial and operational performance last year, coupled with a growth in both recoverable reserves and production figures across its diversified portfolio, has led the executive board at Wintershall to decide in favour of investing some €4.4bn in enhancing its oil and gas activities till 2021. The company intends to continue building on selected projects, especially in low-cost production regions such as Argentina and Russia, but also in Norway. Most importantly from a regional perspective, Wintershall has announced it is open to investing in the MENA region, particularly in Abu Dhabi, if it finds good reason to do so.
As part of the MENA media delegation invited to attend Wintershall’s annual press event in Germany, I had the chance to interview Mehren after the conference in Kassel, where the CEO also lives with his wife and two sons, and ask him about his plans for the Arab region.
Patience is a virtue in the Middle East
Wintershall’s presence in the MENA region dates decades back to 1958, when it drilled its first oil in Libya. By virtue of that fact, although Wintershall’s team today boasts of tens of engineers and specialists from Libya, the steady deterioration of the security situation in the North African country since the Arab Spring of 2011 and the current fierce infighting between rival factions, has compelled Wintershall to contract its operations there to a negligible level.
In Libya, after a thaw in production activities since the start of 2016, Wintershall was only able to restart production again in onshore concession 96 from September 16th and resumed output at a low level of 35,000 BOE per day.
However, as Mehren was making this statement during the event, he was told during his speech that a fresh wave of conflict had brought business to a complete halt in the country. As such, Wintershall’s prospects in Libya currently lie in dire straits, although the company continues to hold on to Al Jurf offshore field, its key asset there.
It is perhaps its laudable work in Abu Dhabi, that presents Wintershall the best opportunity to cement its foothold in the Middle East. The company has been working with the Abu Dhabi National Oil Company (ADNOC) since June 2012 on an appraisal project to develop the Shuwaihat sour gas and condensate field.
The reservoir evaluation includes up to three field appraisal wells and a 3D seismic survey. In the early summer of 2015, the first onshore well (SH 5) was successfully completed and the evaluation of the results encouraged the partners to proceed with the restoration of the field, with them planning to drill two other wells - SH 6 and SH 7 - offshore to a depth of about 5,000 metres.
“There are seven wells, but our wells are numbers 5, 6 and 7; the first four were drilled a long time ago. So, SH 5 was the onshore well that was drilled and SH 6 was the first offshore well that was spud in November 2016, pretty much around ADIPEC. We did that for the public communications purpose of course,” Mehren says laughing.
On being asked about how much of that investment budget announced for 2017 has been allocated for Abu Dhabi, Mehren explains: “Currently, for us Shuwaihat is not an investment, it is an appraisal project. We have agreed with ADNOC to perform an appraisal programme that consists of some seismic acquisition. The first natural point would be to get the result of SH 6, so we will wait for that. Then we will have to see if we feel comfortable enough (to proceed). ADNOC and Wintershall will then have to decide whether to drill for a third appraisal well in the form of Shuwaihat 7 or not, in order to decide the project’s future. We need to have a discussion on not just the technical part, but also the commercial aspect.”
“As soon as we know what is going to happen with Shuwaihat,” Mehren continues, “we will decide what the investment figure is and then we will spend the money. If it turns out to be an interesting and profitable project, we will invest the money. And if that would mean that we have to adjust our annual investment figure from €4.4bn to €4.5bn maybe, then we will do it, that won’t be a limitation. So, it’s not about the investment. The investments are going to happen if we decide to turn this project from an appraisal type into a production project. And of course, it is ADNOC which has to decide whether to go ahead with the project or not.”
Experiences of working in the region haven’t always been pleasant for Wintershall and similar to the daunting task of operating in Libya, its short-lived venture in Qatar ended in an undesirable manner in May 2015, leaving the company with a bitter memory. On being asked about whether he would be interested in exploring upstream opportunities in Qatar in future, Mehren says, “I’ll give you the short answer – no, not at all,” with a wry smile.
“The longer answer would be: you know we’ve had a wonderful project there, a discovery project by Wintershall,” says Mehren referring to Al Radeef gas field. “There was gas we actually wanted to develop in that field. But unfortunately, we had to learn that unlike what we were told before, we will not be allowed access to existing facilities there. We were asked to do everything by ourselves and that made (working on) the project simply uneconomical. That is the reason we not only ended our activities in that project, but also pulled out of Qatar; we closed our offices there, because that’s not the way we see, live and understand partnerships.”
Does Mehren anticipate or has he factored in his business plans a similar scenario in Abu Dhabi, I ask him hesitantly. “First of all, I have full trust in our partnership with ADNOC. I don’t see this (a Qatar-like situation) coming. In addition, since you may say that trust is not everything, we have a completely different contractual framework in Abu Dhabi than we have had in Qatar,” he confidently answers.
“In Qatar, we were really part of that specific license, so it was our risk there. In Abu Dhabi, we have a service contract. I hope this service contract will turn into a real participation in the asset. Typically, in Abu Dhabi we are talking of a concession type of agreement, so I would expect something like that. If the parties do not come to an agreement, that can happen, but that won’t be negative for us. Of course, it will be bad for us, but I don’t expect any financial damage coming out of that,” Mehren says.
With regards to expansion in the rest of the GCC market, Mehren cites practical reasons why that isn’t a priority for Wintershall. “Within the GCC states you should never say never! Our current focus is in Abu Dhabi. To be clear, I don’t see us enter Saudi Arabia. That’s because typically Saudi Aramco does not ask companies of our size to be part of the Saudi oil and gas industry - although, I am not saying that I would not love to go in there.”
“Kuwait is also a bit difficult; we’ve had a number of discussions with KUFPEC in the past on various projects, but basically, they have never materialised. We would look into the other countries in the GCC, but our main focus presently is in Abu Dhabi,” he explains.
Mehren confirms being in “frequent talks” with Abu Dhabi’s state-owned energy investments arm Mubadala Petroleum to identify and collaborate on potential projects. So far the discussions mostly being about partnerships in Libya, therefore means that negotiations won’t be maturing this year at least, according to Mehren.
However, apart from having high hopes from the Shuwaihat venture, the CEO is keen on bagging other concession-type deals for Wintershall in Abu Dhabi. The recent stake sale completion of the ADCO concession by ADNOC, in which Mehren thinks Wintershall could have been a participant, has only raised his desire for claiming a share of the next such prize – the ADMA-OPCO concession, which is due for renewal in 2018.
“That (ADMA-OPCO) is something we are definitely looking to. That is a shallow water development, something we know quite well. We will see whether we can work on that project as a partner,” Mehren says in a wishful tone.
“We are doing a lot of work in the fields of EOR (enhanced oil recovery), especially in chemical EOR, in partnership with ADNOC. We are doing that because we feel it is beneficial to both parties in terms of building a knowledge base. But we are doing that to also prove that we bring the technical skills that are needed in Abu Dhabi. We are absolutely open for business.”
To conclude, Mehren comments: “I am very convinced that if you want to be successful as an E&P company, you will not be successful by cutting costs when the storm comes. You have to be prepared, you will have to be weather-proof to stay in the picture and that means you have to have a large portfolio. It’s not by accident that you find Wintershall in tar sands activities, in heavy oil activities and in ultra-deep-water activities, because only when you have a portfolio consisting of all the three can you do cost-cutting for the rest of your life. That’s because it will only be for a few days that oil will be at $140 a barrel.”