BY DANIEL CANTY

In September Maersk Oil took to the stage to explain its strategy to the international investor and energy analyst community at the Maersk Group Capital Markets Day.

 

In September Maersk Oil took to the stage to explain its strategy to the international investor and energy analyst community at the Maersk Group Capital Markets Day.

 

The presentation was anchored by CEO Jakob Thomasen, who kicked off proceedings with the headline: “Delivery today, growth tomorrow”.

 

That theme was captured clearly in Thomasen’s assessment of near term critical business priorities:

 

  • Continuing to safely improve operational effectiveness to maximise value and production from current assets
  • Execute the major project portfolio to deliver growth to the end of the decade
  • Build the foundations of a long-term growth strategy by resetting and reloading the exploration portfolio and considering targeted acquisition opportunities

 

Summarising current performance Thomasen outlined: “There are three main take-aways in the presentation; number one is that, in line with our expectations our production bottomed out in 2013, and we are a growing business again – not an enormous increase so far, but as I’ve said before, we are engaged in a battle for every barrel, so the 6% production increase delivered wasn’t inevitable, it is an achievement we’re pleased with,” he said. Thomasen then highlighted the maturation of Maersk Oil’s mission critical projects which will deliver growth – and substantial reserves additions – once they are sanctioned in the coming period.

 

The final message to the market was that the target of 400,000 boepd by 2020 remains, though it was stressed that value matters more than volume and producing barrels at any price.

 

“We have an intensive few years of project delivery and execution, and even during this time we insist on double digit returns through the cycle. We are prepared to sacrifice the production target if it doesn’t generate a satisfactory return on investment,” explained Thomasen.

 

Industry Outlook

Contextualising the strategy update in the external market, Thomasen explained that an unsteady couple of years for upstream players had seen costs continue to rise and forecasts on oil prices, by consensus, softening in the coming years.

 

Moreover, a more volatile geopolitical environment made accurate predictions about the future even less certain than usual. “Costs have gone up as projects become more complex and expensive to deliver, but also because the supply side has been overheating for a number of years. Projects have seen a lot of value eroded, causing oil and gas companies to rationalise their portfolios by mothballing and halting projects and retrenching to their home markets.”

 

The impact of the remarkable growth of oil and gas supply delivered by the US unconventionals has also had an important impact on why the oil price outlook is predicted to soften in the medium-term.

 

“Maersk Oil’s response to the changing market conditions is illustrated by refocusing the portfolio which has already seen us reduce deepwater exposure in the US Gulf of Mexico to balance our portfolio a little more towards lower costs and risks, and a growing focus on capital discipline and efficiency for projects about to enter the execution phase.”

 

Thomasen conceded that Maersk Oil could not be entirely immune to rising supply side costs. “However, we come from a good starting point in that regard. We have a steady financial performance, better than our peer group, combined with a substantial low-cost barrel portfolio, a strong project book, spread across a broad range of geographies and geologies, and a really strong demographic in our workforce.”

 

Capital Discipline

Chief Financial Officer (CFO) Graham Talbot used his section of the presentation to explain how the next few years will see the company focus on taking its robust resource base through to reserves, and ultimately through to production.

 

“Approximately 300 million barrels of resources will progress through to reserves as we work our way through delivering our existing project portfolio. Culzean in the UK, Chissonga in Angola and Johan Sverdrup in Norway will all  come on stream towards the 2020 mark, so there is a line of sight, albeit with a pretty major kick up towards the back end of the decade, towards the 400,000 boepd target,” Talbot said.

 

The CFO took the opportunity to assert that Maersk Oil has delivered, and will continue to deliver, substantial financial contributions to the Maersk Group.

 

“On an underlying basis Maersk Oil has contributed about USD 7.5 billion to the Maersk Group over the past five years, and we aim to deliver consistently at that level in the coming years. “

 

He added that maintaining double digit returns will be challenged by the magnitude of the investment program through to 2020. “Peak capital expenditure will occur when both Chissonga and Johan Sverdrup are in their execution phase. In simple terms we will make significant investments in our portfolio over the next few years, in the range of USD 3 - 5 billion annually, but will only see the revenues from those investments towards the end of the decade.”

 

Operational Excellence

Gretchen Watkins, Chief Operating Officer, highlighted the three key foundation pieces of Maersk Oil’s business strategy. “They are built firstly on safety and Incident-Free. Secondly, on technology, where Maersk Oil has an industry leading position in deploying technology to unlock complex resources. And thirdly our people,” she said.

 

Watkins spoke of a diverse portfolio, across eleven different countries, and said that whilst the company has many mature assets, there remains a lot productive life left in them. She also highlighted particular efforts in the Danish North Sea where a dedicated production programme continues to make a significant impact on a declining production profile – at relatively low investment cost per barrel.

“We are more exposed to oil than gas right now, but you will see that, towards the end of the decade, that we will have more gas in our portfolio, and that’s primarily the high pressure, high temperature Culzean project in the UK coming onstream. This is just one example of where we are in the process of pulling projects through the development portfolio, as well as in Iraqi Kurdistan, Kazakhstan, and others.”

 

Three projects in execute, namely Golden Eagle (UK) Jack (US) and Tyra Southeast (Denmark), represent a net CAPEX for Maersk Oil of over USD 2 billion and will all deliver first hydrocarbons in 2014 or 2015. Projects which are approaching sanction stage of their lifecycle in 2014 and next year include Culzean, Johan Sverdrup, and Chissonga.

 

“These projects represent a significant chunk of the CAPEX out to 2020, but also the lion’s share of the 300 million barrels of oil equivalent we’ll add to the resource base in that time too," she said.

 

"Overall, we will remain faithful to our areas of expertise, while continuing to improve our skills and competencies in some step out areas like deep-water and high pressure – high temperature gas," concluded Watkins.

 

Image: Thorbjørn Hansen

Maersk Oil is engaged in exploration activities in the Kurdistan Region of Iraq (pictured).

Golden Eagle (left) in the UK is preparing for first oil towards the end of 2014 and Chissonga, in Angola (right) is approaching sanction.

Gretchen Watkins described the portfolio journey as an evolution, not a revolution

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