May 2013
Dear fellow shareholders,
Our Company is in strong health and 2013 has begun with even more positive news. The value creation for Lundin Petroleum shareholders over recent years has been achieved primarily by our exploration success in Norway.
We recently announced a further exploration discovery in Norway with the completion of the Luno II well. We have unquestionably been the most successful explorer in Norway over recent years and I am pleased that our exploration programme continues to deliver positive results.
We have a very busy exploration drilling programme for the rest of 2013 and in the years to come and I am confident this will result in further discoveries.
I believe Lundin Petroleum is today characterised by five key investment themes.
1. Strong Production – generates strong operating cash flow
Our production for the first quarter of 2013 was 35,600 boepd. About 75 percent of our current production comes from Norway where the Alvheim and Volund fields have outperformed expectations over recent years and still continue to generate the majority of our production.
Our oil is good quality, the Alvheim and Volund crude sells at a premium to Brent, and our operating costs are about USD 8 per barrel. Cash taxes remain low due primarily to the Norwegian fiscal regime which defers a large percentage of taxes for companies like ours who continue to invest in exploration and development. The end result is that we generated operating cash flow of USD 260 million in the first quarter and I expect us to exceed one billion dollars for this year. We are reinvesting this cash flow to develop new fields and drill exploration wells which we believe will further increase shareholder value.
We maintain our production guidance for 2013 of between 33,000 boepd and 38,000 boepd. Existing projects will double our production by the end of 2015.
2. Development projects will double our current production
Our three development projects namely Brynhild, Bøyla and Edvard Grieg are all progressing satisfactorily. These projects will commence production in 2013, 2014 and 2015 respectively and when the Edvard Grieg project is onstream in the fourth quarter of 2015 we will exit that year at a production rate of 70,000 boepd or double our current production. This will result in a significant increase to our cash flow and profitability. The USD 2.2 billion of future capital costs, net to Lundin Petroleum, to complete the Brynhild and Bøyla projects and to achieve first oil from Edvard Grieg will be funded from operating cash flow and existing bank facilities.
We have the people in place to execute these projects and despite the cost inflation being experienced by our industry these projects remain on budget and schedule.
3. Johan Sverdrup – A transformational discovery for Lundin Petroleum
Lundin Petroleum discovered Johan Sverdrup in the Norwegian North Sea. It was the largest oil discovery in 2010 and one of the largest discoveries ever made in the North Sea. It is a world class asset in respect of size and quality and represents the number one priority for ourselves and our partners in respect of development.
15 wells have now been drilled on the structure and the appraisal is now substantially complete. The appraisal programme has provided us with valuable information in respect of the resource size and the development concept.
Statoil as operator of the predevelopment phase will provide an updated resource range for the Johan Sverdrup discovery later this year when details of the concept selection for the development will be announced. The current forecast remains for Johan Sverdrup first oil by the end of 2018.
4. Exploration – Remains the key Focus
Despite Lundin Petroleum’s increased development and production activities over recent years our key focus remains exploration. We firmly believe that in the upstream oil and gas business the major value creation is through access to resources and the best way to do this is through successful exploration.
Our 2013 exploration work programme includes the drilling of 18 exploration wells with a budget of close to USD 500 million. We plan to continue to spend at this level of exploration expenditure in years to come and to maintain a continued geographical focus in Norway and South East Asia.
In Norway our major focus for 2013 is continued exploration in the Utsira High area of the North Sea where we have already made the Edvard Grieg, Johan Sverdrup and Apollo discoveries. The recent Luno II discovery is a further validation of our view that there will be more discoveries in this area. I expect us to appraise the Luno II discovery in 2013 as well as drilling further high potential exploration wells in the area at Kopervik, Torvastad and Biotitt. Lundin Petroleum is the major acreage owner in this area and will therefore likely be the major beneficiary of further discoveries.
In Norway we also maintain our view that the Barents Sea will become a major oil producing region. The discovery of oil at Skrugard and Havis, now renamed Johan Castberg, has confirmed our view that large commercial oil discoveries would be made in the region. Lundin Petroleum is one of the largest acreage owners in the Barents Sea and we continue to increase our licence interests in the area with new awards in last year’s APA licensing round. We will drill two exploration wells in 2013 on the Gohta and Langlitinden prospects.
Our view is that Norway remains relatively unexplored and therefore the third part of our Norwegian exploration strategy is to find a new core exploration area. An example of a potential new area is the Utgard High in the northern Norwegian Sea where we will be drilling an exploration well on the Sverdrup prospect in PL330 in the third quarter of this year. As was the case with the Utsira High we have secured a large acreage position in this region so that if the exploration programme yields positive results, the value of our surrounding acreage will be enhanced.
I have over recent months become more excited about our South East Asian portfolio, particularly Malaysia. Our team have done a great job in building a material licence portfolio and the early exploration results have been encouraging. I expect that we will announce the go ahead of the Bertam project later this year with the finalisation of the commercial arrangements. In addition, the Tembakau discovery in PM307 will be appraised but it looks like it will be a commercial gas discovery based upon its size and location to market. I am also very encouraged with the results of the latest 3D seismic acquisition from our acreage offshore Sabah and expect to be able to announce a multi-well exploration drilling programme on this acreage later this year.
5. Liquidity and Financial Flexibility
Our balance sheet remains strong with low debt levels. Last year we completed a new USD 2.5 billion loan facility with a syndicate of international banks. Our strong operating cash flow coupled with the debt availability will be sufficient to fund our ongoing development projects in addition to funding our exploration programme. Whilst the final details and costs of the Johan Sverdrup development are not yet finalised I am confident that the cash flow from our Edvard Grieg project coupled with the continued availability of conservative debt levels will allow us to develop Johan Sverdrup without the need for further equity.
I hope that you share my enthusiasm for the future of Lundin Petroleum. Our success will be determined predominately by our ability to execute our development projects and to continue our exploration success. I am confident we will deliver.
Yours sincerely,
C Ashley Heppenstall
President & CEO
