Strong half-year - uncertainty about new projects

SDFI 1st half 2009:
Net cash flow from the SDFI to the government totalled NOK 57.1 billion for the first half, a clear decline from the record figure in the same period of 2008 but on a par with January-June 2007. The first half was otherwise characterised by a high level of exploration activity and finding success in licences where Petoro has interests. Investment also remained high as a result of commitments sanctioned in the autumn of 2008. However, Petoro chief executive Kjell Pedersen has warned that this autumn's budget round in the licences could disappoint those who think that exploration and project activity will stay at a corresponding level through 2010.
Petoro presented strong results for the first half of 2009, despite lower prices. Net cash flow to the government from the State's Direct Financial Interest (SDFI) on the Norwegian continental shelf was NOK 57.1 billion. Although clearly below the record level from first half of 2008, this figure was on a par with the same period of 2007.

Exploration activity was high during the period, with considerable discovery success in licences in which Petoro is involved. A continued high level of investment reflected commitments sanctioned in the autumn of 2008, but uncertainty prevails about this autumn's investment decisions for 2010.

The relatively high cash flow, at NOK 33.2 billion and NOK 23.9 billion for the first and second quarters respectively, reflects positive results from the gas business. An important factor here was fairly good gas prices, which are in turn a consequence of the fact that these prices move in line with oil prices but with a time lag of three-six months.

However, a decline in gas prices towards the end of the first half will have consequences for SDFI revenues during the rest of 2009.

The positive exploration trend in early 2009 continued during the second quarter, with interesting discoveries in six of eight completed exploration wells in which the SDFI had interests. All these finds are in mature areas close to existing infrastructure, and can accordingly be brought on stream quickly. Their resources are put at 40-80 million barrels of oil equivalent (boe) for the SDFI portfolio.

Kjell Pedersen, president and CEO of SDFI management company Petoro, is satisfied with results for the first half: "We've managed to maintain good earnings from the portfolio. and exploration results so far this year are encouraging. It's important that we not only explore in new areas but also mature new investment projects which can help to maintain production, the revenue stream and expertise on the NCS."

However, he is disappointed that another fatal accident occurred in these waters, this time on the Oseberg field in the North Sea during May.

"We'll be following up the reports from the operator and the Petroleum Safety Authority Norway (PSA) in the licence with the aim of preventing a recurrence of such an incident."

Petoro has noted a tougher prioritisation of investment projects as a result of stricter capital discipline in the oil companies, Mr Pedersen says. He sees nothing wrong in the companies wanting to increase their financial flexibility during uncertain times - and even if the projects in Norway are commercial in themselves.

"On the other hand, both oil companies and suppliers also bear a great responsibility for ensuring continued project development and exploration on the NCS. That will maintain the level of activity and expertise in these waters. Its licensee structure, with one dominant player, can make the NCS particularly vulnerable at times like these."

Petoro is the only company which devotes its full attention to safeguarding commercial interests on the NCS, and there alone. It will continue to strike a balance between some cooling down and reduction in cost levels on the one hand, and ensuring that profitable projects in the SDFI portfolio are implemented on the other.

"This remains a challenging job in 2009, and we're devoting big resources to it," says Mr Pedersen. "I'm afraid that those who believe exploration and project activity will remain at a correspondingly high level through 2010 are going to be disappointed when the licences present their budgets toward the end of the year.

He emphasises that Petoro does not face the same capital constraints as many other companies, and can therefore play an important role in this context.

Income after financial items for the SDFI in the first half was NOK 55.1 billion, compared with NOK 77.8 billion for the same period of 2008. Operating income in the second quarter came to NOK 24.4 billion as against NOK 37 billion for the same period of last year, while net cash flow was NOK 23.9 billion compared with NOK 40.7 billion.

Total oil and gas production in the second quarter averaged about one million boe per day, down roughly six per cent from the same period of 2008. The decline for the first half was three per cent. Gas production during the first half rose by three per cent from the same six months of last year, particularly because of new fields such as Ormen Lange and Snøhvit. Output of oil and natural gas liquids (NGL) fell by nine per cent, primarily reflecting the decline in production from mature fields in the portfolio.

Sveinung Sletten,
vice president external affairs, Petoro AS
+47 95 07 55 54
+47 51 50 20 24

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