February 2012
Dear fellow Shareholders,
It is a great pleasure to update you on developments at Lundin Petroleum following our exceptional performance in 2011. 2011 was transformational for the Company when it became clear that Avaldsnes/Aldous (now renamed Johan Sverdrup) is one of the largest discoveries ever made in the North Sea. Our strategy, which is predicated on organic exploration growth, has delivered excellent success which resulted in a 100 percent increase in the share price of Lundin Petroleum during 2011, equating to increased shareholder value of SEK 27 billion.
The major news in 2011 was clearly the announcement of increased contingent resources in the Avaldsnes discovery, offshore Norway. As we had previously indicated, the Avaldsnes structure extends to the west into the Statoil operated PL265 and this was confirmed with the Aldous Major South discovery. Avaldsnes and Aldous Major South are essentially one connected giant oil field. Our Avaldsnes appraisal drilling programme in PL501, where we are operator, coupled with Statoil's discovery well and subsequent appraisal well in PL265 has confirmed that the thickness and quality of the Jurassic reservoir is better than previously assumed. Consequently, Lundin Petroleum has increased the contingent resource range for the Avaldsnes discovery in PL501 to between 800 million and 1.8 billion barrels of gross recoverable oil. Statoil has announced a contingent resource range of 900 million to 1.5 billion barrels of gross recoverable oil for the Aldous Major South discovery in PL265. As a result, the Johan Sverdrup discovery is estimated to contain gross contingent resources of between 1.7 and 3.3 billion barrels of recoverable oil. This makes the discovery one of the five largest discoveries ever made on the Norwegian Continental Shelf and the largest discovery since the mid 1980s. Furthermore, the discovery is located in 115 metres of water depth, in a reservoir of less than 2,000 metres, close to existing infrastructure with spare capacity and with oil that is of excellent quality. It is truly remarkable that a discovery of this size and quality could be made by Lundin Petroleum, in the heart of the Norwegian North Sea, 45 years after the first exploration activity began in the area.
The priority in 2012 is to fully appraise the discovery to better define the resource range and to provide information for development planning. The results of the first 2012 appraisal well targeting the southern extension of the discovery were disappointing with the top reservoir coming in low to prognosis and below the oil water contact. Appraisal drilling will, however, continue with a further five to seven new wells likely to be drilled in PL501 and PL265 in 2012. In tandem with the appraisal programme we are working closely with Statoil and our partners to move the conceptual project development planning forward. The discovery will be a major contributor to North Sea production for years to come and due to its size, location and quality of reservoir, will be one of the most valuable discoveries ever made in the North Sea.
Financial Performance
Lundin Petroleum produced excellent financial results in 2011 with a net result for the year of MUSD 155.2. The strong production performance has continued and resulted in operating cash flow of MUSD 676.2 and EBITDA of MUSD 1,012.1 for the year. Our balance sheet remains very much under leveraged, with net debt of only MUSD 133, and an asset base which will support much higher leverage if required. We expect to continue to generate strong operating cash flow from our producing assets which will be the primary source of funding for our future development and exploration expenditures. As a result of the Luno field development project moving forward, we are likely to refinance our existing reserve based lending facility in 2012 to provide additional financial flexibility.
Lundin Petroleum has raised no cash equity since the initial USD 50 million equity raise when the Company was formed 10 years ago. Our growth has been funded from internally generated cash flow and the conservative utilisation of bank credit. This financial strategy will continue with the requirement for additional equity unlikely for the foreseeable future.
Resources
We have been very successful in increasing our resource base from exploration drilling and this continued in 2011. Our proven and probable reserves which are independently audited by Gaffney Cline & Associates increased by over 20 percent to 211 MMboe and again we have achieved an exceptional reserve replacement ratio of 264 percent. The producing Alvheim and Volund fields continued to yield increased reserves as well as the Tellus discovery which is now incorporated into the Luno development.
In addition to our reserves, our contingent resources increased by over 200 percent to 851 MMboe primarily as a result of the Johan Sverdrup field. Lundin Petroleum, as a result, has increased its net reserves and contingent resources to over 1 billion barrels.
Production
During 2011, production averaged 33,300 barrels of oil equivalent per day (boepd) which was at the high end of our guidance range. The fourth quarter production of 34,700 boepd was particularly strong as a result of the continued outperformance of the Volund field, offshore Norway. Our forecast for 2012 is for production of between 32,000 and 38,000 boepd which represents an increase of 5 percent from 2011 if we assume the mid point of our guidance range. The increase of production in 2012 will be driven by production start up from the Gaupe field, offshore Norway at the end of the first quarter as well as new development wells on both the Alvheim and Volund fields.
Development
We have made excellent progress with respect to our development projects and are on schedule to achieve our forecast of doubling production by the end of 2015. The 70,000 boepd production target will be driven principally by our various Norwegian development projects. Whilst it is premature to discuss production forecasts from the Johan Sverdrup field it is, I believe, conservative to assume that our net production will more than double again after production start up from this field.
If we briefly look at the progress on our various development projects:
- We have submitted the plan of development for the Luno and Tellus discoveries. The Luno development is a major standalone development project operated by Lundin Petroleum and involves the construction of a new production platform and associated pipelines along with the drilling of 15 new wells. The gross development cost will cost approximately USD 4 billion with a forecast gross peak production of 90,000 boepd. The design basis of the Luno facilities accommodates the coordinated development of the nearby Draupne discovery operated by Det norske oljeselskap ASA. I expect a commercial agreement in relation to a joint coordinated development of Luno and Draupne to be finalised shortly. The Luno platform design capacity will accommodate in excess of 120,000 boepd when Draupne production is combined with that from the Luno field.
- The Gaupe field development wells are drilled and the facilities are substantially complete. We are now awaiting arrival of the pipe-laying vessel to allow us to complete the development and commence production. The weather in the North Sea has been extremely bad this winter and has delayed operations so we are now expecting first production at the end of the first quarter 2012.
- We have received the plan of development approval for the Brynhild field from the Norwegian Ministry of Petroleum and Energy and are now moving forward with the execution of the project. First oil at a forecast gross production rate of 12,000 boepd is expected at the end of 2013.
- We expect to submit a plan of development for the Bøyla field subsea tieback to the Alvheim FPSO in the first half of 2012.
Exploration
Our view has always been that, despite being seen as a mature area, the Norwegian Continental Shelf represents an area with excellent exploration potential. The higher historical tax environment compared to the UK coupled with the fact that the independent sector was not active in Norway until 10 years ago meant that exploration drilling activity was much lower in Norway than in the UK. The geological setting is essentially the same and therefore the lower drilling activity in Norway creates an opportunity for aggressive exploration driven companies such as Lundin Petroleum. Our exploration success with the discovery of Volund, Luno, Apollo and now Johan Sverdrup clearly shows that this strategy has worked.
Nevertheless we believe there is more to be found. Despite the priority in respect of rig capacity to the appraisal of Johan Sverdrup, we will have an aggressive exploration programme in Norway in 2012 with eight new exploration wells. We will be drilling three new exploration wells in the Southern Utsira High where we feel we have a very good understanding of the subsurface. The exploration drilling will continue in 2013. We will be drilling the Albert well in the Møre Basin in the Northern North Sea close to where there have been interesting recent discoveries in the UK and Norway. In the Barents Sea, where we are one of the largest acreage owners, we have acreage close to Statoil's Skrugard and Havis discoveries where there will be an exploration well in 2012.
We continue to successfully acquire new acreage in the Norwegian licensing rounds with the award of 10 new licences in the APA 2011 round announced in January 2012.
Our exploration drilling campaign in Malaysia is proceeding well. The Tarap gas discovery announced in the second quarter of 2011 has been followed up with a further gas discovery at Cempulut. The two discoveries coupled with a third existing discovery in our licence means we have contingent resources of over 250 billion cubic feet (bcf) of gas in block SB303 offshore Sabah, east Malaysia. This is most likely a sufficient resource to consider a cluster development in an area which is facing an increasing gas deficit. We have had two oil discoveries offshore peninsular Malaysia and are now looking at development options for the Bertam field. Our Malaysian drilling campaign will continue in 2012 with a further five wells.
The future
We have created significant shareholder value over the last 10 years since Lundin Petroleum was formed. We are today one of the largest independent exploration and production companies in Europe. Our exploration team has proven that our organic growth strategy in Norway has been successful and I think we are on the right track to replicate this in Malaysia. We are confident that there is more success to come. We have the people, the licences, access to technology and the financial capacity to further increase our resources which will deliver more increases to shareholder value.
At the same time we have expanded our organization to develop our discoveries and have the financial capacity to bring these projects to production. In a world where it is becoming increasingly difficult to find conventional oil resources in proven petroleum basins located in stable political environments, I am convinced that the value of these resources will increase over time. The 2011 story has been an amazing experience but more importantly the future is very exciting, and I and the Lundin Petroleum team are focused upon the continued success of our Company.
Best Regards,
C Ashley Heppenstall
President & CEO
