Lundin Needs Huge Premium to Sell Stake in Sverdrup Oil Find

Lundin Petroleum AB will only reduce its stake in the Johan Sverdrup discovery, Norway’s biggest oil find in decades, if buyers offer the Swedish explorer more than $10 a barrel, Chief Executive Officer Ashley Heppenstall said.

“It would have to be at a huge, huge premium to where we see the current market value of the assets,” he said at a presentation in Oslo today. “An undeveloped barrel here in Norway is worth anything up to $10 a barrel. Maybe for Johan Sverdrup, time will show it’s worth even more than that.”

While Lundin is planning to participate in the field’s development, it will “never say never” and would have a “duty to shareholders” to consider any offer exceeding the company’s valuation, he said.

The Johan Sverdrup field could be Norway’s largest offshore oil find since Statfjord and the third-biggest ever with between 1.8 billion barrels and 2.9 billion barrels of resources. Production, due to start in 2019, will eventually represent as much as a third of all Norwegian oil output and double Lundin’s own production to more than 150,000 barrels of oil equivalent a day from about 75,000 at the end of 2015, Heppenstall said.

While Norwegian oil assets have been sold at about $5 a barrel on average on sanctioned projects in recent years, Sverdrup could fetch twice as much provided the buyer has cheap access to capital, Danske Bank A/S analyst Andre Benonisen said by phone. The most likely buyers would be Asian national oil companies, he said.

Incomparable Asset

“There are no assets comparable to Johan Sverdrup” in Norway, Benonisen said. “Cash break-even will probably be around $20 a barrel. That’s much lower than the average of well above $50 a barrel in Norway. Size is the most important, and reservoir quality as well.”

Stockholm-based Lundin owns 40 percent of one of the three licenses holding the North Sea oil deposit and 10 percent of another. Analysts estimate Lundin will own 20 percent to 25 percent of the entire field once talks with partners including Statoil ASA, Det Norske Oljeselskap ASA, Petoro AS and A.P. Moeller-Maersk A/S’s oil unit.

Statoil has said the so-called unitization talks will be finished before a plan for development and operation is presented. Approval of a PDO for Sverdrup is expected by the second quarter of 2015, Lundin said. Heppenstall declined to say what share Lundin expects because the talks are continuing.

Development Cost

Lundin declined as much as 1.5 percent and closed 1 percent lower at 115.7 kronor in Stockholm. That’s 12 percent less than the closing price on Dec. 19, the day before Statoil cut Sverdrup’s resource estimate and delayed the start of production by a year.

The Norwegian company also postponed a decision on the field’s development concept amid disagreements by the partners about the size of investments.

The Sverdrup partners are “aligned” and will present a development concept in the first quarter, Heppenstall said today. Det Norske, the only company to have given an estimate on the likely size of investments, has said it sees spending on the first phase of Sverdrup at as much as 130 billion kroner ($21.1 billion), an estimate Heppenstall said is “fair.”

Cost inflation in the oil industry is “an issue” in Norway and globally, Heppenstall said. Still, costs will grow more slowly in the next 10 years than the last decade, he said.

Reiterates Guidance

“It’s simply not sustainable,” he said. “We’re starting to see rig rates flatten off, we’re starting to see talk of rig rates coming down as more capacity comes into the market. That’s a good thing.”

While the Sverdrup installations will be powered from land, the electrification of the rest of the Utsira High area, including Lundin’s Edvard Grieg project, is still being discussed, the CEO said. Reports that the platform won’t be ready to take power from land if an area solution is decided are “absolute rubbish,” he said.

Lundin reiterated production forecasts of 30,000 barrels to 35,000 barrels of oil equivalent a day in 2014, rising to 50,000 barrels on average in 2015.

The company plans to invest $2.13 billion in 2014, up from $1.73 in 2013, it said in presentation material. Of that, $380 million will be spent on exploration and $300 million on appraisal drilling, it said. Lundin plans to drill 12 wells off Norway.

Before it's here, it's on the Bloomberg Terminal.