Petoro role and strategy A driving force offshore Norway Petoro role and strategy

Development of the NCS business 1960’s 1970’s 1980’s 1990’s 2000’s 2010’s Oklahoma pioneers Further t&c improvements royalty, CO2 tax Parliament cuts red tape Gov. accept EU gas liberalisation GFU out – comp. based gas sales SDFI sale, Statoil privatisation Petoro Gassco Predictable t&c New drive for the Arctic Industry boom by private enterprise but then.... State takes control through Statoil, NPD, regulations and the taxman New areas open up for the industry internationally =competition for capital and people Improved t&c Norw. industry sees need to compete abroad Statoil wins strong positions through BP alliance Gov. accepts EU liberalisation of licensing and purchasing Focus on politics =suboptimal solutions? = cost overruns Too much Statoil = SDFI Huge t-o-p gas deals by Statoil, = later GFU 1986 price fall = tax cut = new investments Majors complain, .....but remain High oil prices, hightened government take Examples of hidden ”re-nationalisation” Global positioning More market Commercial thinking MARKET OPPORTUNITIES KNOCKS Little awareness in Norway ”Let the foreigners do this” Send in the state “Resource nationalism” Politics before value? More government Statoil established 1972 SDFI established 1985 Petoro established 2001 Petoro role and strategy

Petoro offshore Norway Others Petoro act as owner on behalf of the government (§11) Role: licensee in the offshore licenses/fields Votes for the government share Jonit venture cooperation Only the NCS – and not operator 165 licenses/jv interesets – 40 producing fields Commercial goal Max. value of the SDFI Influence through ownership/competence – not by exercising authority Monitoring Statoils marketing/sales Max. value, just distribution of cost/income Financing, management, owner control: Parliament funds operations The Minister is the General Assembly Professional board Government rules for economic control asplies Audit General IOCs Cash flow 103,6 bn NOK Production (kboed) 1,08 mill boe/d Number of licenses 146 Number of fields 36 Number of employees 70 Value of SDFI 1.1.2010 865 bn NOK Petoro role and strategy

What is SDFI – and Petoro? The State Direct Financial Interest = A portfolio of direct government owned oil and gas reserves, fields and facilities for processing and transportation. Petoro AS = A government owned management company which acts as the owner of SDFI on behalf of the government in licenses and other joint ventures where SDFI has an ownership share. Petoro’s goal is to maximize the economic value of SDFI – based on sound business principles. Petoro role and strategy

SDFI basics SDFI (State Direct Financial Interest) 1985: SDFI established SDFI is owned by the Norwegian State SDFI accounts (income and expenses) are integrated in the Norwegian State’s accounts and a part of the Norwegian State’s budget From 1985 to 2001 SDFI was managed by Statoil Management based on business principles Towards third parties Statoil appeared to be owner of the SFDI SDFI represents about 1/3 of Norway’s reserves/production Petoro role and strategy

Petoro basics Petoro was established in May 2001 Petoro - management company for the SDFI portfolio Took over the management after the privatization of Statoil Formal position as a licensee Petoro is a partner in the production JV’s – never operator Petoro is a State owned company, funded by Parliament via the State budget Petoro role and strategy

Main principles of Petoro in the Petroleum Act (Section 11) The State participates in the petroleum activity by retaining a share in selected production licenses or taking a share in infrastructure ventures when granting the license. This share is the SDFI-share owned by the State Petoro 100% state-owned company charged with managing the business aspects of the SDFI interests in the Norwegian petroleum activity Petoro is a licensee and party to all license agreements and other relevant agreements All income from the SDFI-share belongs to the State All costs or investments relating to the SDFI share are covered by appropriations in the annual State budget All costs of Petoro as the management company are covered by appropriations in the annual State budget Separate accounts for SDFI and Petoro The Norwegian State is by law liable for all obligations undertaken by Petoro Petoro is a limited company and standard corporate governance principles apply However; the board have some additional obligations; asset transactions are decided by the Minister under mandate from the Parliament Petoro role and strategy

The wider government context The Norwegian Parliament The Government Ministry of Petroleum and Energy (MPE) Ministry of Labour (MOL) Ministry of Finance (MOF) Ministry of the Environment (MOE) Norwegian Petroleum Directorate (NPD) Petroleum Safety Authority Government Pension Fund Global Petroleum tax office The Climate and Pollution Authority STATE OWNERSHIP EXERCISING AUTHORITY Oil and gas companies Statoil (ca 67 %) Ptoro (100%) Shell ExxonMobil ConocoPhillips Total BP Eni etc. Petoro role and strategy

From oil to money (PET to ORO) …and from money to more money SDFI = 35-40% Yearly SDFI cash flow ~100 bn. NOK Petoro role and strategy

Big job for small company PRECONDITIONS FOR SIZE: Statoil markets and sells all the oil and gas under a common strategic ownership Parliament accepts that Petoro’s responsibility for a number of small and non-strategic fields can be outsourced to other companies Parliament accepts that Petoro does not need all competencies and capacities of the international oil companies Petoro has been able to muster competence and capacity from two competing Norwegian companies, Statoil and Hydro THINGS HAVE CHANCED After the Statoil-Hydro merger, Petoro needs to do more technical and commercial work/studies of its own The maturing of the NCS implies increased focus on big mature fields, not least by Petoro due to major state ownership Petoro role and strategy

Champion of prioritization 80 % of value in first 10 assets, 95 % in first 20 100 200 300 400 500 600 700 800 900 1000 80% License management: Active Selective Administrative Accumulated NPV @ 7% before tax Wood Mackenzie - 2006 Petoro role and strategy

Influencing business decisions Ability to influence spending Actual spending IOR pilots Maturing reserves Quantum leaps in pro- duction drilling Technology qualification Area development options Progress monitoring Challenge and support operators (partly by leaving them alone…) Feedback/learning Benchmark Transfer of experience Drilling efficiency Integrated operations Operations strategy Availability of drilling rigs Drainage strategy Active (but not quite as active) partner Pro-active partner Decision phase Execution phase Petoro role and strategy

NCS – opportunities and challenges

Petoro role and strategy

NCS: Great opportunities – and challenges Potential for high output – long time Smaller discoveries – new areas to drill are needed More to gain from fields than from new discoveries Time criticality in mature fields TURNAROUND: Ways of the past won’t meet challenges of the future Total: 4,5 mill boe/d (2004) Recoverable resources (NPD-2011) Oil: 3,4 mill b/d (2001) Undiscovered Discovered Resources in fields Reserves Produced/sold Total Oil Prognosis 2011-2015 (NPD 2011) Historic production NCS (Source: NPD) Illustration based on NPD-outlook 2009 and reduced estimates in 2011 1970 1980 1990 2000 2010 2015 2020 2030 Petoro role and strategy

Mature fields – backbone for further development Other fields 10 biggest fields in 2010 Win- win, big- small fields Source: RNB 2010 80% of SDFI oil and gas production from 10 field i the period 2010-2025 Petoro role and strategy

2-3 times more production wells needed REALITY: No. of wells halved since 2001 Well cost quadrupled WE NEED: Better understanding of reservoirs and reduced well cost to increase investors’ confidence and drill 2-3 times more wells NOK millions No. of wells 2.5 km Investments per well from fixed structure Investments per well from floating structure Number of wells 2005 1985 Source: Statoil Petoro role and strategy Scource: Statoil

The installations live longer than designed for Increased production - increased life Increased lifetime - opportunity for the development of new discoveries – and IOR/EOR Aging – requires investment in integrity management Installations age at expected abandonment Installations age at expected abandonment Typical lifetime is 25- 30 years Expected abandonment Scource: RNB Petoro role and strategy

Investments are time critical Production Production wells Modifications/ infrastructure Investments Time Illustration of typical field life span Petoro role and strategy

Golden times ….which harm profitability and disguise the need for time critical investments and cost control Petoro role and strategy

Oil production falling faster than we think 2001: 3,42 mill b/d What we thought in 2005 about 2010 2010: 1,86 mill b/d 45% ned fra 2001 Kilde: OD Petoro role and strategy

Time critical measures Trenger flere brønner – borer færre Oljeproduksjonen faller Vi investerer ikke ihht planer 3,42 mill fat/d - 45,5% Investeringer i SDØE-porteføljen 1,86 mill fat/d Long term challenges Time critical measures 2001 2010 Ny kostnadstsunami Trenger flere brønner – borer færre Petoro role and strategy

Challenging concentration of ownership Partner shares of key fields Diversity of IOCs, NOC and others was key to successful development of the Norwegian oil and gas business Picture have changed: - Petoro big partner - Statoil dominating operator - IOC drive for global growth may lead to reconsiderations - New players – in exploration, not in mature fields Eierskap i SDØE/Petoros 11 viktiste felt Statoil SDFI Others Others: 12 companies, mainly IOCs, avg. share: 9% Petoro role and strategy

Petoro’s strategy for the period 2010 – 2015 SDFI portfolio, dependant on few fields with long production lives Realise the potential in and around large mature fields Increase the lifetime of prioritised installations through technology selection, efficient drainage methods and more wells Prioritize selected installations to main hubs and provide solutions for area discoveries Holistic and timely development of the gas value chain Robust sales strategy for a challenging market (short and long term) Optimizing capacity investment and the phasing of new fields Explore business opportunities in the Vøring and the Barents Sea south Continued exploration and maturation of resources – Snøhvit train 2 key in the Barents Sea Ensure prioritization of the SDFI resources other fields 10 largest fields in 2010 SDFI-portfolio - From oil and gas to gas Petoro role and strategy

Petoro’s top three fields HEIDRUN Improved understanding of the reservoir, more and cheaper wells, draining strategy Petoro’s top three fields Petoro role and strategy

Petoro’s top three fields GULLFAKS Confidence in the reserves base, long term draining strategy, profitable and safe water injection, increased drilling pace, consider new well head platforms Petoro role and strategy

Petoro’s top three fields Foto/illustrasjon: Statoil SNORRE more wells, increased gas injection and advanced EOR. Petoro initiative for 1-2 new wellhead platforms. Cost of aging. Petoro’s top three fields Petoro role and strategy

A driving force offshore Norway