StatoilHydro ASA (NYSE:STO)
Q1 2010 Earnings Call
May 5, 2010 8:30 AM ET
Lars Sorensen - Head of IR
Eldar Saetre - EVP & CFO
John Olaisen - Carnegie
James Hubbard - Morgan Stanley
Elaine Dunphy - Deutsche Bank
Irene Himona - Exane BNP Paribas
Oswald Clint - Bernstein
Hootan Yazhari - Banc of America/Merrill Lynch
Rahim Karim - Barclays Capital
Christine Tiscareno - Standard & Poor’s
Barry MacCarthy - Royal Bank of Scotland
Shawn - Arctic Securities
Nadia Bendris - Focus Banking
John Rigby - UBS
Welcome to Statoil’s first quarter 2010 earnings presentation. My name is Lars Sorensen and I’m the Head of Investor Relations. Today’s presentation can be found on www.statoil.com and downloaded this website. Questions from US on the web could be as usual sending using the submit question button on your screen.
Without further ado is my favorites to welcome to the speaker Executive Vice President and Chief Financial Officer, Eldar Saetre.
Thank you, Lars and thank you to all of you for joining us at this first quarter earnings presentation and not surprisingly, the first quarter has been like many quarters before, a strongly influenced by the macro environment. This is illustrated by the positive signs of recovery that we have seen in the global economy, especially in the United States and in China, also by issues that we have experienced within the euro, sown and the following volatility in the financial markets and last, but not least for our industry that raising oil prices and oil demand, which is mainly driven from Asia.
It’s a pleasure for me, once again to present a quarter with generally good operational performance for Statoil, a solid production, good trading resource, which I will revert to and the continued strict costs discipline and they all contributing to good financial performance in actually all of our business areas this quarter.
On top of this, we have also made good industrial progress. We have enforced our value chain, our gas value chain in the US, both through increasing the Marcellus acreage and strengthening the market access. The exploration activity continues to deliver high value and we have matured the resource based [weather] by approving and sanctioning six new projects this quarter. So let me start by looking at the financial results for the quarter.
Statoil delivers a net income of NOK 11.1 billion, which is compared to NOK 4 billion in the same quarter last year and there are three main explanation to this positive development, first of all we have had much higher earnings from our international E&P business segment. Secondly, the losses on net financial items has been lower this quarter compared to last year and finally, we have had a significantly lower tax rate, reported tax rate in this quarter.
The main drivers have been the continued recovery of the oil price of around 50%, 48% since the first quarter last year and this is measured in NOK. This was partially offset by decrease in the gas price of 35%. I should also mention that despite the lower gas price that we have seen, we have sustained solid earnings from our gas trading business, which I will back to you.
Statoil’s first quarter reported net operating income was NOK 39.6 billion, which is compared to NOK 35.5 billion last year. The adjusted earnings were NOK 38.9 billion, which implies adjustments this quarter of a moderate NOK 0.7 billion. Adjusted earnings after tax were NOK 12.1 billion, which is up 14% compared to last year and the effective tax rate on the adjusted earnings that is excluding tax on net financial items were 69%. I will revert to the resource for each of the business areas later in the presentation. So let me now say a few words about the oil and gas production.
Total equity production reached 2,102 million barrels per day in the quarter, which is up 28,000 barrels compared to the same quarter last year, and this represents actually a record high production for the group of such on a quarterly basis; and this record was driven by 13% increase in the equity production outside the Norwegian Continental Shelf and partly offset by 2% reduction in Norway.
The growing production outside Norway was mainly driven by the startup last year of Tahiti and the Thunder Hawk Fields in the Gulf of Mexico, the ramp up of Agbami in Nigeria and increased production from ACG in Azerbaijan and also from Marcellus in US.
The decrease in the Norwegian liquids production was explained by the expected decline on the matured fields in Norway and again this was partly offset by the Kvitebjorn being back in full production last year and also new production from the Alve field and the Tyrihans field since last summer.
The customer up tick on our long term gas contracts has been high in the first quarter and this is due to relatively cold weather, as you know in most of our core markets. The entitlement production was down 1% at 1,915,000 barrels per day and this implies PSA effects of 187,000 barrels per day between the equity and the entitlement volumes, which is slightly above are guiding of 180,000 barrels per day at US$75 oil price, which by the way is unchanged from what we are presented earlier.
I will now go into the results from each of the business areas briefly. Starting with E&P Norway, which reached adjusted earnings of NOK 29.1 billion this quarter, which is 2% down from last year; the main drivers for this change were at 46% increase in the liquids price, which out of NOK 9.5 billion to last year’s result and 41% lower transfer price of gas towards the natural gas business segment, which contributed negativity with NOK 9.2 billion and the oil and gas production, the lower oil and gas production had negative effect of NOK 1 billion.
Operating costs in Norway increased by 4% in nominal terms mainly due to, as I mentioned new capacity from Alve and Tyrihans and also combined with high volume, actually well maintenance, well related activities in this quarter. The reduction in exploration activity from last year also led to NOK 8.3 billion, reduction in exploration expenses.
The international E&P segment had adjusted earnings of NOK 4.5 billion, which is considerably up from the NOK 0.3 billion last year. Most of this NOK 4 billion of the improvement is caused by the 54% increase in the liquids prices again in Norwegian Krone.
Entitlement production increased by 5%, while total equity production increased by13% to 557,000 barrels per day which again is a record high production or our production outside by Norwegian. The increase in operating expenses of NOK 0.4 billion was driven by the higher production volume as such and again driven by new capacity coming on stream. In addition, we have had more feels in preparation phase, preparation for production and this is mainly driven the high impact activities we have from Leismer in Canada and Peregrino in Brazil.
If you’d also mention that royalty payments also increased of relation to our Canadian Offshore, Canada operations by approximately NOK 200 million this quarter compared to last year. From the first quarter of last year, we have also had a 23% reduction in the SG&A costs within the international segment of which 15% is explained by the currency development and rest 8% is driven on cost saving program.
Natural gas had adjusted earnings of NOK 4.6 billion this quarter compared against NOK 5 billion last year. Net operating income from processing and transport that part of the business was NOK 1.7 billion, which is down from NOK 2 billion last year and this was mainly driven by lower tariff revenues from temporarily reduce capacity, of course which is by the way now back at full capacity.
Also in this quarter, despite lower gas prices in general we have been able to sustain a high level of earnings from our flexible gas marketing and trading part of the business, which is on part with last year at NOK 2.9 billion. We have realized an average gas prices in all our markets, volume weighted-average during the first quarter of NOK 1.64 per standard cubic meters and this equal US$7.3 per million Btu.
So the good results from our gas business are due to the following reasons. First of all, a solid long term gas contract portfolio would have substantial component of all indexation intact combined with a high gas off-take in the first quarter from our customers and also the very good opportunities that we have to move gas both in time and in geography from the flexible infrastructure to capture arbitrage opportunities.
Finally, our last business segment manufacturing and marketing, deliver adjusted earnings of NOK 0.9 billion in the quarter compared to NOK 1.6 billion last year. The adjusted earnings within our oil trading business were at NOK 0.6 billion. This is compared to NOK 1.2 billion last year and then I should remind you that the first quarter of 2009 had exceptionally steep contango curve ahead of them, while the trading resource this quarter driven by a flatten contango price structure compared with what we saw one year ago.
Adjusted earnings within manufacturing part of this business were zero that the methanol production and the refineries and this is compared to NOK 0.2 billion in the same quarter last year, and this decrease is mainly due to lower refinery margins in NOK, which was partly offset by higher methanol prices.
Adjusted earnings in energy and retail were NOK 0.4 billion in the first quarter, which is compared to NOK 0.2 billion in the same quarter last year, and the increase was largely due to higher volumes and higher fuel margins. So all-in-all, our adjusted earnings added up to NOK 38.9 billion as I mentioned, which is 8% higher than we saw in the same quarter last year and the corresponding tax rate was 69%, which is inline, I think with the guiding that we have given you earlier.
Then if you commence also to our cash flow and our financial situation, this illustration shows our cash flow movements during the first quarter. As you can see Statoil generated again a strong cash flow from our operations of NOK 50 billion, approximately. Tax is paid in the quarter amounted to NOK 13 billion, and then I have mention that we paid only one tax payment this quarter and we pay six of them during the year. So next quarter will include two tax payments compared to this quarter’s one single tax payment in Norway.
In addition to the dividend for 2009 of NOK 19 billion, will be paid on the 2 of June, obviously, subject to the AGM approval, our investments are progressing as planned according to plans with the next spending of around NOK 19 billion in the quarter; and as you can see our net debt to capital ratio at the end of first quarter was up 26% or nearly 26% and we expect this ratio to be slightly reduced towards the end of the year given the current level of oil and gas prices for the rest of 2010.
Now, let me say a few words about how we continued to move new buys through the value chain and the activities in that context for this quarter as highlighted at our strategy update in February in London, we have a substantial resource space of approximately 22 billion barrels; and our main focus is now on maturing this portfolio, improving the overall capital efficiency, and reducing breakeven prices throughout the most scoping technical scopes of these projects, leveraging our technology base, and also sourcing and organizing the projects in the most cost efficient manner.
In the first three months of this year, we have sanctioned five new projects on the Norwegian Continental Shelf. Two of these projects decreased in queue template and Njord’s North-West Flank have been developed through the so called fast-track capital efficiency program, which we have talking about on the Norwegian Continental Shelf, which aims to reduce the cost and increase the speed of development or in relation to our substantial portfolio of small-to-medium-sized projects on the Norwegian Continental Shelf.
So we have started on this program and these are the two first results that we have delivered and the focus is as we talk about earlier on standardization and industrialization as the main approach to enhance these developments.
In addition, we haves sanctioned the Gudrun and Marulk projects and as you might have noted, we have also now agreed the way forward with our partners on the Valemount project in the North Sea; and these produce all important steps, important projects to maintain the production level on the Norwegian Continental Shelf. Outside NCS, we have also sanctioned Chirag Oil Project in Azerbaijan, so that’s up to six projects.
In 2010, we will maintain a high level of exploration activity although slightly lower than we have seen over the last couple of years. On past year’s success on exploration continues so far in 2010. So far, we have announced seven discoveries, four of the Norwegian Continental Shelf and three outside of Norway. Among those, the sidetrack of the promising the Vito discovery in Gulf of Mexico, I should mention that, because they are about to be a promising development and also the recent discovery close to the Norne field so called (inaudible) development, which might support a longer life for our Norne field.
So let me now conclude the presentation by just conforming our guiding for 2009 and ‘12 short version is that, there is no changes to the guiding. Our equity production is expected to be in the range of 1.925 million to 1.975 million barrels per day of oil equivalents in that range this year and between 2.1 billion to 2 billion in 2012.
Our production in the first quarter has being more or less as expected. However, significant uncertainties about the gas markets remain as we have into the summer season where off tick the seasonal off tick is traditionally lower; and on top of the seasonal variations, we also expect to see challenging gas markets in the near term due to the supply overhang situation that we’ll see and we are prepared to defer gas volumes to the extent necessary focusing on value creation more than volume target as such.
In addition, second quarter marked the start of comprehensive turnaround season, which in continental self and although the majority by far will be carried out in the third quarter, we expect around 30,000 barrels per day in quarterly effects in relations to maintenances activities in the second quarter.
On the portfolio, we estimated an impact of around 50,000 barrels per day, so that there will be a lot of maintenances in the third quarter. There’s no change to our guided unit production cost of NOK 35 to NOK 36 per barrel for this year and we also maintain our CapEx guiding of NOK 13 billion and finally on the exploration, we expect to drill and complete around 50 wells that US$2.3 billion this year.
So with these remarks, I leave the word back to you, Lars.
Thank you very much Eldar. We’ll now start the Q-and-A and let me just repeat for the audience on the internet, whether you can send the question to me by pressing the submit question about on your screen. I’ll start with the question from the internet and then you can think about whether you’ve got any questions from our floor here.
I’ll one take question from two people, Jason Kenney and Iain Reid both wonder, “What impact have you seen and what impact do you expect from the Transocean Deepwater Horizon Incident in the Gulf of Mexico at the movement?”
Well, I think what we have seen now impact directly into our activities so far, the only impact is basically that we have offered our services and advice to persist in the current situation. In terms of our on going drilling activities, we’re drilling on two wells in Gulf of Mexico, our two exploration wells, of two rigs in operation they are drilling as according to plans; and we obviously reviewed our activities one more to be sure that it’s safe to proceed with the operations and that’s the conclusion. So we are proceeding with the drilling activities and exploration activities as such.
So that’s the short-term, longer-term it’s an industrial question really and I would be surprised, if there were no consequences coming out of an event like this, but I think the main before it’s possible to say anything from about that, I think it’s necessary to get sort of deeper into understand the causes that has led to the current situation and see the full consequences of that; and I would be surprised, if there were no consequences. I think future activities will be scrutinized based on what is happened and I also think that obviously, based on events like this what kind of requirements and will be gone through by the authorities, but that’s just speculation, but the kind of consequences that you could imagine and potentially also that sort of the process of opening up new possibilities for the industry as such might also take more time.
Thank you. There a couple of questions about maintenance, I think you already told us that the effect was 50,000 Arizona annual basis and the second quarter effect was 35,000 barrels in the quarter. So let us just repeat that. Then there is a question from Lane Dunfy, who asked, “Can you tell us what volumes were lost in the first quarter to maintenance and I guess that’s pretty…?”
Yes, it’s very low volumes really, so I think we’re talking about 8,000 barrels per day and they split this around 50/50 between the Norwegian Continental Shelf and the international maintenance activities. So a very low activity level in relation to the maintenance this quarter.
Lane just wants to continue to on that subject, “It wants to be sure that the 50,000 barrels estimated turnaround was included in our production guidance of 1.925 million to 1.975 million.”
That’s included, yes.
Then there’s a question from John Olaisen from Carnegie, in Oslo here. On gas, “There’s the strong first quarter gas sales gives some room for upside in the 2010 for ocean guidance?”
I think basically, it has been a strong demand and strong off tick situation, but that’s typically also what we see in the first quarter. So basically in the first quarter, we are producing as much gas as we can, because that’s basically what the customers want. So I don’t think we should read what has happened in the first quarter as an indication that in terms of where we will sort of come out in that range it’s more or less as expected slightly on the strong side, but not very much different from what we typically see in the first quarters. I could just John repeat, the uncertainties that we are facing, we are not moving into a different situation and the supply overhang and the supply in demand balance that we have talked about for is still there. We don’t see any fundamental changes to that and/or prepared to move our volumes and focus on value creation in our gas marketing activities and also repeat what we said about the turnaround activities.
Okay, there’s a question on gas again from Iain Reid. “How much NCS gas from the Norwegian continental shelf was sold outside the long term contracts this quarter?”
Well, I haven’t got that number to be honest, but typically the off-take in the relation to our long term contracts has represented much higher proportion in the first quarter, but the excess spilt I haven’t got that split and I’m not to able to sort of give you number on that at present.
We can take the last question from Iain Reid. “Can you update us on the sale of 40% Peregrino? When should we expect this and how will it affect the 2012 profession target?”
In terms of potential sale, I’m not prepared to give any comments, if I started for the practice on that, it would be take us in the wrong direction, I think so. I’m not prepared to give any comment other than to say that typically owing 100% of an asset is not necessarily an ideal situation. So divesting apart of this asset is in option for us, but I’m not prepared to comment anything more specific than that.
Then there’s question from James Hubbard with Morgan Stanley. “Can you just say what’s West Qurna 2 contracts are currently out for tender, while other major contracts needs to be tendered and what are the risks that the project delays occur due to ongoing Iraq political uncertainty?”
In terms of contracts, specific details on contracts and tendering, I think what we have to do in that case is to refer to the operator, which is Lukoil. In terms of implications from sort of the political situation and the election situation in Iraq and implications on the projects, and it’s impossible for me to speculate and I would never speculating about anything like that, but we are proceeding with the projects as fast as we can and are focusing on setting up the project and building up the organization that can move this project forward as be as possible.
Thank you. I’ll take the last question from Elaine Dunphy from Deutsche Bank. “It’s about Norwegian continental shelf and the profession volumes there. Oil volumes on the NCS were down 55,000 barrels per day or 7% year-on-year on natural decline, measures to maintain reservoir pressure and operating issues. Can you tell us how much was driven by operating issues and how should we’d be considering oil production on the NCS through the rest of the year?”
First of all, the decline represents approximately 6.5% year-on-year on the liquids side. We have guided on average decline rate of around 5% and not splitting between oil and gas, but we indicated that oilfield typically we will have a higher decline within the gas field as such and the other component, which goes more into sort of the portfolio, considerations is when new capacity is coming and in this case we have had two new fields coming in last summer, who is ramping up and they are combined oil and gas production. So basically, we have not had sufficient new capacity to compensate for the decline this year.
We put a lot of measures into fighting the decline and both for utilizing sort of the existing infrastructure and that goes back to fast track approach that I talked about. We have a lot of smaller discoveries in Norway, which is now are speeding up, tying into existing infrastructure and is obviously also, all the IOR measures that we are putting in to fight decline. So our approach and our ambition is to maintain the overall oil and gas production on the Norwegian Continental Shelf for the next 10 years at approximately the current levels, there is no change there what we see this quarter has no implication whatsoever this is expected for that ambition; and gradually as remove forward oil production would be replace by gas production.
Thank you. There’s a question about tax rate from Irene Himona at Exane BNP Paribas. “The 69% tax rate in the first quarter was unexpectedly low, could you please provide guidance for the full-year 2010 and likely tax rate and discuss once again the reasons for the low first quarter level?”
Well basically, I think our guiding is pretty around 70% that’s what we have said as an average. We have indicated then Norwegian Continental Shelf at around 74% and that’s exactly what it was this quarter, we have indicated the gas business, that’s around 70% slightly lower this quarter so, there were slightly more revenues on the gas business on onshore taxation this quarter than might be typical, but not significant. So that might explain, why we are below 70% rate.
The international tax percentage along for 43% and they have guided at 40% to 45%. So it’s right in the middle and the downstream is at 30%, which shows a spot on according to what we have indicated earlier. So pretty much there, tax rate this quarter is maybe slightly lower, but not much compared to what you should expect going forward, but there will be significant variances on the reported tax rate, because of the functional currency that is now in US dollars for the holding company, while the tax is still in our recent calculation, so that you will differences for those reasons, but based on the adjusted number tax and adjusted numbers, this is the kind of tax rate 70%, 72% that you should see going forward.
Thank you. Then we have a question from Oswald Clint at Bernstein. “Can you quantify the impact of natural gas earnings in the first four quarter 2010 from new long-term contracts and from news that which incorporating the higher level of swap prices?”
Well, I’m not rewriting the new contracts actually coming into effect in first quarter. We have talked earlier about the renegotiations the discussions we have had with some of our customers regarding the price structures, and how we split the volume of some of the long-term contracts between oil indexation and gas indexation, and we have indicated that the we have moved trench of some of these contracts from oil indexation to the spot market pricing and that has had effect from this quarter and that effect is included in the average gas price of 164 that we have reported and basically I think Rune Bjornson, who is the Head of our Natural Gas Division at the [capital market as update].
In February, he was clear that we basically took our volumes of the 16 contracts as a temporary measure, but the actual contracts will not change. So the terms and conditions on the contracts are the same and then we’ve taken our small volume trenches that we have either let the consumer to decide, either you can get as spot prices or we can sell it in the spot market, and you won’t take the gasoline. So it’s a matter of restructuring the volume a little bit in this magnitude situation. We’ve been able to keep up earnings in the gas business quite to handsomely this quarter.
There’s a question from Hootan Yazhari at Banc of America/Merrill Lynch. “Is the 7% decline in Norwegian oil production indicative of worsening decline rates in the portfolio, doesn’t make you nervous of your longer term explorations to keep productions flat in Norway?”
I think the accept number is 6.5% and as I’ve said it as expected. So this has more to do with the decline on gas and oilfield is higher than gas fields and higher than the average. So this has more to do with sort of the sequencing and when new capacity is coming in, but the underlying decline from the major defiles that is declining is not behaving anything different from what we have expect it to do in this quarter.
Question from Rahim Karim at Barclays Capital. “Can you help us understand the finance charges with the net debt of 75.3 after adjustments and that the finance charge, I think it has to be so low, any guidance for the full-year? That’s about the question. So can you help us understand the finance charge with net debt of 75.3 after adjustments?”
I think we have table in the MDNA, where we tried to explain what is happening with the financial, if you look at the net debt, the interest payments and cost should be higher than what is reported. The reason for this has to do with the interest rate derivates because we are swapping some of our debt, some of our interest exposure into floating interest rates and that means that it’s a swap, which is accounted for in our accounts market-to-market and this interest rate has gone down slightly in this quarter that is given in market-to-market benefit of approximately NOK 1.1 billion in the quarter, which goes into interest rate calculation of presentation as you see in the accounts.
So if you adjust for that, the interest rate is approximate or the interest cost is approximately NOK 1.2 billion and 0.56 of that is interest rate as such and 0.67 is accretion, which is basically related to the removable cost and the annual sort of deprecation of the removable cost. So it’s a good question, but there’s an explanation and I think it’s giving in the MDNA documentation.
Let me just take Rahim’s next question. “You talked about the weather proving the upside to the radar stations. Can you talk about how you expect this to evolve assuming a stable (Inaudible) there must be the temperature on gas price is alluding too. You talked about weather proving upside to the realizations, can you talk about how you expect this to evolve assuming a stable and we hope price?”
Do you understand the question?
I think we have to ask Rahim to repeat and then I can take somebody else in…
Basically, what obviously temperatures as heating is an important sort of segment in the gas market. So heating on residential demand represents approximately 50% of the gas demand and so that has obviously a big impact and is very much now depending on the temperature has been a cold winter and we are moving into different season, but to state explicitly sort of the effect of that single component on the gas price going forward. I think that’s the gas market, we something really has to look at all components of such and it’s not allowing to see any one component or so…?
A couple of more questions from Oswald Clint at Bernstein, “Can you provide some indication whether exploration activity weren’t disputed soon will Russia could be seem in the near term of the recent discussion, or is it still at the political level?”
Well, first of all, we are very pleased with this settlement that appears to be now emerging, but we also accept that it will take time, it has go through notification process and there might be details, for what that needs to be put in place and the rectification process, which we’re already optimistic will be dealt with quite soon; and then there is a long process to mature this seismic activities and political processes supporting up, leading up to sort of more type of drilling and licensing activities.
So it’s a long journey ahead of us in this area, but as obviously it’s extremely interesting for us to hopefully begin the opportunity to take a closer look at this acreage, because everything we see from outside of the acreage points in the direction that it’s a very interesting now on attractive products.
Next question is from Roosevelt Berkley. “Can you update us on the buyback program you talked about in the fourth quarter results?”
Well the buyback program is something, which we have said as part of our toolbox is stated specifically in our dividend policy that buybacks is now something that we might use. I think to avoid any speculation as to whether we were intently use it or not, it’s something that we now intent to ask for AGM and every AGM going forward. So it’s in place, it’s part of the toolbox, because we have typically in Azerbaijan and can do this only once a year; and I think it’s prudent to put the mandate in place.
So it’s an effective part of toolbox that can be activated in the case that situation should emerge, but it should not be seen as that there are better specific plans to use buyback programs effectively, just putting a mandate in place as an integrated part of the dividend policy.
Just to stress, we don’t have a mandate right now, but we have applied the AGM for mandate on the 19 of May.
Yes, that’s true, Lars, thank you.
The last question from Roosevelt; “You talked about the quality of the oil in the Vito discovery, can you talk about the quality of the reservoir?”
This is operated by Shell and typically in these kinds of instances we leave this kind of news flow on Vito to Shell. So I know express today was that we think it’s interesting and we have a 25% stake in Vito and it’s something that we hope and now can be credit basis for new development, but it’s earlier to say, but we’re optimistic as far we see, but all most specifics we’re leaving Shell to do provide news on that.
There’s a question from a Private Shareholder, at least somebody who hasn’t put in a company here, (Inaudible). “Is the future growth to come from an internal growth and exploration both on NCS internationally or is that all aiming more on M&A activities?”
All the growth that we have talked about, going into 2012 is based on organic activities coming from exploration and assets that’s in our portfolio for the time being and in February at their strategy after you also presented as comprehensive portfolio of assets, which pointed at the growth also beyond 2012, although we did not indicate any more specifics and try to quantify that growth.
So all these statements and this strategy is based on organic developments and the assets that we have and the prospects that we have an exploration opportunities that we have in our portfolio, that does not mean that the company would stop looking at in organic opportunities that wouldn’t be prudent for management to do. So we will always look at that kind of opportunities, and to the extant they would refine them attracted for creating shareholder value, we would look into it, but the strategy and the main focus is now to mature the strong resource base and all we have said on growth business going forward is based on that.
There’s a question from [Ken Sullivan] at Credit Suisse. “Could you talk about the recent progress you’ve made on betting of our gas trading capabilities in Europe and the US and can you give us some color on the gas arbitrage opportunities you’re seeing currently?”
I think we have gradually over time, now build strengthen and build our organization on the gas trading site, both in Europe, in Norway and UK, that also in the US based on the gas resources from (inaudible) from LNG from Gulf of Mexico and now also shale gas. So we also build the quite substantial gas trading business in the US.
Build systems, competence people knowledge and more comprehensive trading portfolio with more flexibility and we have also strengthened this through adding storage capacity in the UK. So we build both infrastructure competence and people resources through this business and we have also developed further in terms also integrating our long term business and the short term trading business, so to optimize this two legs of our gas marketing business and Deal is basically to use the flexibility that we have in our trading system., we have several landing points into the continental on the UK.
Gas markets, we have also several sources into the US trading hubs as I mentioned, and to move volumes in time and geography arbitrating through utilizing this whenever we see opportunities, and I should also mentioned that we have, on the Norwegian Continental Shelf substantial flexibility in particular on the Troll Field and the [Uzbek] field, which is actually a storage we can keep the gas, in the reservoirs without paying for expensive storage other places and use that volume flexibility as well and we also have energy flexibility in the trading portfolio as we now snowed into the portfolio.
So this is gradually the components and how we have developed this business and I think we have proven over some quarters now that we have been able to sustain a reasonable robust level of earnings, that doesn’t mean that it’s not going to be volatile you will see ups and downs, but there are no major component of speculative manners in our gas trading this is base low trading basically.
There is a question from Orlando [Finch] at MMG Investments, “Does the expected gas market weakness for the rest of 2010 impact the rate or the level of your CapEx plans in 2010 and beyond?”
No, the CapEx plans for ‘10 and ‘12 is going accordance to plan and our financial planning and capability to go on with the program from a financial perspective is robust in relation to whatever gas price development we might see. So we don’t see any developments in the gas markets, short-term that might have any impact on our investment programs as such.
A question from, Christine Tiscareno at Standard & Poor’s, “Should we expect more deals to deliver natural gas from Marcellus or you covert for the moment on your upcoming Marcellus production? That was the first question. Should we expect more deals to deliver natural gas from Marcellus or you covert for the moment on your upcoming Marcellus production?
Well, as I said, we have strengths in this system. We have added approximately 10% to the acreage inline with the agreement that we have at Chesapeake. So basically when Chesapeake adds acreage to Marcellus, we are given the opportunity to participate into that acreage and that’s something we do on a regular basis with smaller trends and what we did now was to pull some of this together into a bigger byte, so representing approximately 10% of the current acreage.
As I said, this is an integrated part of the agreement with Chesapeake and we will pursue those kinds of opportunities to add high quality acreage to our current position also going forward.
There’s a further question from Christine, which is about Gulf of Mexico, “How were delays in Gulf of Mexico drilling effect your production plans? And I guess for 2010, the production for 2010 and the production for 2012 that we’ve guided on will not be effected by this drilling of course, because --?”
We don’t see any effects on the production at least from what we have seen our impact so far.
Barry MacCarthy at Royal Bank of Scotland; “What where the reasons for the both preference for partial IPO of energy and retail of alternatives such as the full exits by our sale to our trade buyer or perhaps financial investor which might be less dependent upon marketing conditions?”
I think it’s decision process in the Board and concluding that there’s a realistic outcome is the partial IPO that has to do with the capacity likely capacity in the market and the fact that we in any case would be tight very much to the ENR through support agreements and supply agreement before we sort of can get all the types and I think it’s also important that will shows support to the new company as through that kind of ownership and make sure that sort of we have faith in the new company and also willing to invest and keep the share in the new company going forward and then we take it from that going forward.
There’s a question from Shawn at Arctic Securities. He asked about Peregrino, he asked about our considerations regarding maintaining 100%, but I think you already set that we always can say that whether only 100% for the life is right, but then we asked about projects status for Peregrino.
Peregrino is moving forward as planned. We had some issues and have to wait for weather conditions.
Question, there two jackets in place and that we have to lift the modules on top of that and both these platforms (Inaudible) and eventually weather conditions were not possibly even nice to us, so now all the modules are in place on both the Paribas A and Paribas B. So now, all activities are moving on and there is no change to the time schedules, because obviously, we kitted for some flexibility in this respect, so we expect the Paribas to be in production early next year.
Two more questions left and one from Nadia Bendris at Focus Banking in Norway, what is the share of gas sales links to long-term contracts, what’s the average duration of these contracts; and what is the remaining average duration of the contacts.
As I said, the main part of our gas volume is still linked to long-term contracts and of the long-term contracts the main part is still linked to oil so approximately 25% to 30% of our total volume, total volume including what goes beyond the long-term contracts on typically on an annual basis is linked to oil
So in terms of contracts length obviously some of these contracts have been in place for sometime quite some time that getting older, so in the next decade we are getting into situations where some of these contracts are running out, but to be specific in terms of averages, I haven’t calculated it in that respect.
I think, we won’t be understand, they had natural gas in February, he said that really long term contract they were sort of 25 to 35 years when they were entered into and the first one of those was start expiring in sort of 2017 and then the last ones in 2019-ish in that range, but we’ll really quantify how much it is, but I’ll say these are long term contract really.
Last question I have here is from John Rigby at UBS. “Obviously, Krone or US dollar was less volatile in the first quarter, but even so the FX/IFRS adjustments look very small. Is it a net of many movements or is it is explained by reduced, I think only I have changed some of your underlying interpretation of the accounting policy?”
No, there’s no change through the accounting policy. Basically, the main part of this is related to the exchange that we have most of our revenues in US dollar, but we pay taxes and dividends in Norwegian Krone a lot of it. So basically, we swap into or we exchanged into Norwegian Krone to the extent necessary and then we swap back into US dollar, because you don’t need, which currency on a running basis.
So this swampiest market is accounted for on a market-to-market basis, and what is in the accounts is reaching Krone part of that swap compared to the US dollar currency that we have. So that represents a loss of NOK 2.5 billion, reflecting a currency difference of I think approximately 4%. So that’s the main the part, these kind of components functionally with currency, but the main component is related to the swap from US dollar, I think there’s no change to the practices.
Okay, I don’t see anymore questions on floor and there are no more questions on the internet. So for me there’s only left to say, thanking very much for participating and good-bye.
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