CHAIRMAN S ADDRESS ANNUAL GENERAL MEETING 4 MAY 2007

Transcription

1 CHAIRMAN S ADDRESS ANNUAL GENERAL MEETING 4 MAY 2007 Ladies and Gentlemen Welcome to Oil Search s 76 th Annual General Meeting I m delighted to see so many of our shareholders, landowners and other supporters here with us today. Over the next few minutes, I d like to provide a review of 2006 and will comment briefly on our current performance. I will then call on Oil Search s Managing Director, Mr Peter Botten, to provide a more detailed overview of operations and discuss the outlook for

2 2006 was a challenging year for Oil Search. I am pleased to report that despite some hurdles, the Company delivered a record profit performance - the fifth consecutive year of profit growth - and ended the year in an exceptionally strong financial position. In light of the strong performance over the year, the Board approved the payment of a record dividend of eight US cents per share, which equates to 24.2 toea per share. Like profits, this was the fifth consecutive year of increasing dividends. The PNG Government was a major beneficiary, receiving 47.5 million Kina in dividend payments in respect of the 2006 financial year. This is in addition to the 2005 final dividend payment, received in March 2006, of 30.3 million Kina. During 2006, Oil Search continued to focus on maximising production from our PNG oil fields. 2

3 Although most of these fields are now mature, and production ordinarily would be declining at between 10 20% each year, the Company was successful in increasing gross production by 5% over 2005 levels. This pleasing result was achieved by a combination of detailed technical and geological work and continued investment into the fields. Since Oil Search took control of these fields in late 2003, some 34 million barrels of oil have now been produced, over and above the previous operator s expectations. We remain of the view that, with appropriate investment, we can hold production from the oil fields steady for another two - three years. While production from the PNG oil fields rose, Oil Search s net share was 16% lower than in This was due to the sale, at the beginning of the year, of a parcel of our PNG producing interests to AGL. While the sale price was excellent, with close to US$400 million in cash received for these 3

4 assets, it reduced Oil Search s percentage interests in the Kutubu, Moran and Gobe fields. Despite the drop in production, 2006 sales revenue was only 3% lower than in Core profit after tax rose 4%, to US$207.5 million. Including the profit made on the sale of assets to AGL, Oil Search s profit after tax was US$412 million, more than double 2005 s profit after tax. The excellent profit result was driven by two major factors: firstly, strong oil prices, with good demand for Kutubu blend, which is a light sweet crude, ideal for the production of petrol; and secondly, tight control over costs. On costs, the oil and gas industry globally continues to face severe resource shortages, both for people and equipment. This is creating substantial upwards pressure on costs. In particular, aviation and aviation fuel are a key 4

5 exposure for Oil Search, given that most of our operations require substantial air support. Despite this, a number of initiatives taken in 2006 meant that our core field costs in PNG rose only 8%, which was a good result in light of cost pressures. We are currently implementing some changes to the way we handle our logistics and manage our inventory, aimed at ensuring that operating costs remain under control and we can more efficiently service our expanding exploration operations. Also, we are augmenting our drilling capacity by buying two new state-of-the art drill rigs, one of which will be arriving into PNG in the second half of 2007 and the second in early The running costs of these two new, rigs are expected to be considerably lower than the current contracted rigs and will improve drilling efficiencies considerably. The Company continued to improve its health and safety activities during the year. Ensuring the 5

6 health and safety of our staff and contractors, in all our diverse and challenging operating locations, is a core value for Oil Search. Efforts to improve our performance in this area are led by, and strongly supported by, the Board and the senior management team. The tragic helicopter accident that occurred last April, when three contractors died and four were seriously injured, was very disappointing and saddened everyone within the Company. It has highlighted that while Oil Search s safety standards are world class, and significantly better than our peers in Australia, we need to continually strive for improvement. The lessons learned from the extensive investigation into the helicopter incident have been included in the Company s operating and risk management plans for Turning to gas commercialisation, one of the biggest challenges of recent times was the decision, earlier this year, to suspend activities on 6

7 the PNG Gas Project. This was an extremely hard decision to make, given the considerable amount of management time and funds that had been dedicated to this project over a number of years. Much effort had been put into advancing this Project, not only by Oil Search, but also by our joint venture partners, local landowners, government ministers and bureaucrats. So it is worth taking a few minutes to explain why our attentions are now being focused elsewhere. In early 2006, it looked increasingly likely that the PNG Gas Project was going to move to a positive project sanction decision. The deal with AGL, concluded in 2005, had largely underwritten the market in Australia, and it looked likely that all other outstanding issues would be resolved over the course of However, in mid-2006, the AGL/Petronas joint venture responsible for building, owning and operating the Project s pipeline in Australia, decided to withdraw from that 7

8 role. This was partly due to change in strategic direction on the part of AGL, but also due to concerns about rising capital costs. A revised, lower cost, pipeline configuration in Australia was proposed and analysed, and expressions of interest for a new pipeliner were received from a number of interested parties. This confirmed Oil Search s view that the PNG Gas Project was still viable, subject to continued market support and appropriate cost control. However, during 2005 and increasingly throughout 2006, Oil Search had received a number of approaches from a range of gas buyers and project developers, all interested in buying PNG gas. At the same time, we had observed a marked improvement in the market for Liquefied Natural Gas, or LNG. We saw rapidly escalating prices and increasing demand, particularly in the Asia/Pacific region, driven in part by growing environmental 8

9 considerations. In contrast to three years ago, when the PNG Gas Project appeared to be the only viable way of commercialising PNG s large gas resource, there were now a number of alternative opportunities. We felt it was important to fully assess these opportunities before proceeding any further with the PNG Gas Project. So, in the second half of 2006, Oil Search conducted a detailed analysis of all the commercialisation options. When placed side-byside, it became obvious that the PNG Gas Project was no longer the optimal long term way of developing PNG gas, with gas for LNG and petrochemicals capable of providing far superior returns. The reason for this is that gas prices in Australia are the lowest in the developed world, primarily because of the abundance of coal in east Australia. Gas sold for an LNG development or petrochemical plant can attract much higher global gas pricing, which means increased revenues for 9

10 everyone involved, including the upstream participants, landowners and Government. So when the Heads of Agreement between the Hides and Kutubu fields came up for renewal at the end of January, the agreement was allowed to lapse and work on the Gas Project was officially suspended. Our focus now is to push forward, as quickly as possible, with an alternative gas development, or developments, which maximises the long term value of the gas resources. It should be noted that we are not starting from scratch in this, as Oil Search has been working on a range of other gas options for some time, as part of its multi-pronged strategy. We strongly believe that PNG has all the prerequisites to become part of an elite group of countries world wide that supply LNG. We have 0

11 the resources; we are ideally located, close to the fast growing markets of SE Asia; and we have a supportive Government that is pro-gas development. Together with ExxonMobil and the other joint venture partners in the Hides, Angore and Juha fields, we have recently agreed terms to undertake detailed feasibility work on an LNG development based on these fields. While Oil Search believes that there are already sufficient gas resources in these three fields to underwrite an LNG development, the PDL 2 joint venture participants, which own the Kutubu and Moran fields, also have the option to join in these studies. In parallel to the work being spearheaded by ExxonMobil, Oil Search is discussing LNG prospects with other parties, including British Gas, which has strong experience in building and operating large LNG plants. We are very excited about the 1

12 prospects of being involved in LNG, one of the fastest growing industries in the world. Based on our existing discovered resource of gas in PNG, Oil Search is in a strong position to own around 30% of any LNG development that may come from development of our core gas fields. Oil Search is also continuing to develop plans to create a gas-based petrochemical industry in PNG. During 2006, considerable progress was made in advancing the development of an industrial park near Port Moresby, where a number of plants can be co-located with shared infrastructure facilities. Further work on this is ongoing with a range of partners, including Mitsubishi, Itochu and Oswal. There are considerable economic advantages to Papua New Guinea from the current LNG and petrochemical plants proposals, when compared to the export of raw gas to Australia under the PNG 2

13 Gas Project. These developments will see the gas being processed in-country and will generate significant investment and job opportunities, both during the construction phase and thereafter. However, for any of these plans to move forward, considerable effort is required on the part of the upstream joint venturers, landowners and the Government. We need a strong, experienced and committed operator, a sound technical development plan and an economic and fiscal framework which ensures equitable benefits distribution to all key stakeholders in PNG. It is paramount that all these issues, including Government and landowner participation and fiscal terms, are resolved in a timely manner, so the progress of these projects is not delayed. We are all impatient to progress gas development as soon as we can and monetise our large discovered resource. Given the huge scale of any 3

14 LNG development and the long term returns that these projects bring, it is important that industry works closely with Government on appropriate policy settings that encourage early development, whilst setting a stable investment framework for long term multiple gas projects in country. It is important to note that PNG based entities, Oil Search, the Government and Landowners, will own almost half the interest in any LNG development in country, ensuring appropriate returns and profits stay in PNG. We are uniquely placed to make LNG work for us and the country. It is an exciting time, with the prerequisites of resource base and unprecedented market demand now in place, to bring an LNG development to reality. Oil Search will have a leading interest in these projects, bringing long term value to our shareholders and this country. 4

15 While we already have a large inventory of undeveloped gas resources, some 800 million barrels of oil equivalent net to Oil Search, in light of the extremely strong global market for gas, the Company has commenced an active gas drilling campaign in PNG. This programme, which comprises both the drilling of new exploration targets and the appraisal of existing small gas fields, is designed to increase the amount of proven and probable gas which can be sold, to fast track further development. In addition, we have also recommenced a concerted oil exploration programme in PNG. In recent years, our key focus has been on exploiting the existing oil fields better - the investments made into the oil fields have had rapid payback due to the high oil price. However, with two new rigs soon to be operational in PNG, now is the time to refocus on exploration. During 2007 and 2008, we will drill a number of oil prospects, many of 5

16 which are close to existing infrastructure. If these are successful, they could be brought onstream relatively quickly. We have also increased substantially our exploration activities in the Middle East and North Africa. Early encouragement has been seen in Egypt, particularly in the East Ras Qattara Block in the Western Desert. By the end of 2007, we will have a very good idea of what our Middle East portfolio has to offer. Peter Botten will review our exploration activities in more detail in his talk later. At this point, I would like to thank the Somare-led government for their continued support during 2006 and, indeed, over the past five years of Government. The stable economic and operating regime that has prevailed in PNG has been a key factor in allowing us to continue to invest and grow 6

17 our business here. While we have increased our investment in other parts of the world, Papua New Guinea is our home. We are fully committed to our operations here. We are pleased to have been involved in the recent Offshore Licencing Round, together with our partner Nippon Oil. The licence we have applied for builds on our existing offshore position and will help to open up this high risk, frontier area. We were a little disappointed, though, with the low level of interest in the licencing round, as a higher level of activity offshore would help all operators in the area, improving the cost effectiveness of the various programmes. 7

18 Oil Search s commitment to PNG goes well beyond what is required from us as an operator and licencee. We are committed to supporting sustainable development and our aim is to leave a positive long term legacy in all the areas in which we operate. There are two areas that I d particularly like to highlight: our community health programmes and infrastructure development under the tax credit scheme. In many of the areas where we operate, health and access to medical facilities is limited. Oil Search is providing substantial health support services, both to our employees and the local community. We are very proud of what we have achieved on the community health front, 8

19 particularly in terms of training. With Oil Search assistance, the number of health workers in our Project areas has increased by 26%. Also, eight health facilities, previously closed down due to lack of staff, have re-opened. In 2007, our HIV/AIDS programme, in which Oil Search together with the Asian Development Bank provides HIV/AIDS counselling, testing and treatment as part of a nationwide programme, will be a particular focus area. Oil Search continues to participate actively in the tax credit scheme. Here, a percentage of company tax can be invested by joint venture partners into approved infrastructure projects in the areas in which they operate. Since 1992, over US$117 9

20 million generated by the oil fields has been spent on a range of projects, including building roads, bridges, school buildings and police facilities. Over the last few years, Oil Search has been involved in the construction of the Samberigi Road, the Kikori High School, Kikori Hospital and Tari Court House. Through these programmes and our many other community activities, in education, training and development, local business development and care for the environment, we hope to make a genuine contribution to the lives of ordinary Papua New Guineans. Finally, I would like to talk about some changes to the Oil Search board. During 2006, we welcomed two new directors to the Oil Search Board. Mr Tim Warren joined the 0

21 Board in May 2006, after a long and distinguished career with Shell. He has made a significant contribution to the Board, based on his extensive experience in major projects and in developing countries. Mr Gerea Aopi, who many of you here will know well, also joined the Board in May. His local knowledge and experience has been invaluable and Gerea too has been contributing strongly to Board deliberations. I would now like to ask Mr Peter Botten, our Managing Director, to make a more detailed presentation on the Company s activities, before we start the formal part of this meeting. 1