Revus Energy Targets Profit From Mature Fields

STAVANGER Aug 25, 2006 (Dow Jones Newswires)

Explosive growth in the number of oil and gas companies operating on the Norwegian Continental Shelf (NCS) is driving value extraction from mature fields, according to Tim Sullivan, deputy chief executive officer and former CEO of Revus Energy AS (REVUS.OS).

Revus is an Oslo-listed independent exploration and production company. As smaller companies like Revus join with partners of similar size, their combined financial muscle, together with an innovative approach to exploration and production, means they can move into mature areas, seen as uneconomic to oil majors and incumbents, and turn a profit.

"Norway always needed more companies, it needs companies with the same sort of strategy who bring their own ideas," Sullivan told Dow Jones Newswires Friday.

The recent increase in the NCS, part of a worldwide trend of smaller companies moving into mature areas, has seen a doubling of the number of such companies operating in the area to 60 in the past decade.

Still, Sullivan said that the rise in competition from startup firms could limit Revus' access to exploration licenses. Revus now has 28 licenses, all located in the Norwegian North Sea, of which 11 were awarded in last year's licensing round.

"I'd be surprised to get as many as 11 again this year; - there's an awful lot of competition," Sullivan said. "But they're partners as well as competitors," he added.

Through a consortium of firms, Revus has access to the Bredford Dolphin drilling rig, enabling it to drill its significant portfolio of prospects until the beginning of 2009. It plans to drill 14 to 16 wells during that period.

Sullivan did not rule out the possibility of an expansion into the Haltenbank area of the NCS in the 2006 Norwegian licensing round, which closes Sept. 29. The firm, which started up in 2002, said at that time that it would remain solely in Norway for five years.

"That's up next year, but if we went elsewhere we would have to go in with a portfolio of assets," Sullivan said. "To go into a country you need local expertise. The easiest way to waste money is to not know what you're doing. I'd be surprised if we went of out of the North Sea, U.K. the Netherlands, Denmark," he said.

Revus has a strong focus on bringing unexplored licenses to production, but has only limited production capability itself. It recently sold a minority stake in the Fram B gas and condensate field and adjacent licenses to Bayerngas Norge As, a unit of Germany's Bayern Gas.

"Gas production requires certain asset skills. It's difficult to be in one part of the value chain. The asset was more valuable to Bayern Gas than to us," Sullivan said.

Revus now prefers not to have production targets, and indeed the sale of Fram B cut its output significantly. An earlier goal to produce 25,000 barrels a day by 2010 "is no longer achievable" Sullivan said.

Instead, the income from Fram B will be ploughed into further exploration, he continued.

"It's churning the asset to realize value today," he said, adding that while risky, Revus' exploration strategy also enables the biggest value creation.

High oil prices are an advantage to the firm, but Sullivan noted that when Revus started up, oil prices were at $25 a barrel.

"We were delighted at $30 a barrel and are only going to be concerned if it goes down below that; it's not going to do that," Sullivan said. "We have to consider it's likely to go down to $40-50 a barrel - it's an industry full of cycles, it will always have cycles." But oil price volatility hurts producers the most, he said. As a result, Revus has not hedged against the possibility of an oil price fall. In the second quarter, Revus reported it achieved an average oil price of $70.04 a barrel.

"We've a low production level, and given the Norwegian tax system, we're glad we haven't hedged," he said.

The 78% Norwegian tax on oil companies has deterred some of the biggest investors in the area, but is attractive to smaller firms. Companies can offset all their operational costs against their tax bill, meaning the government effectively gets the same reward.

In its second quarter interim financial report, Revus' oil and gas production was 190,717 barrels of oil equivalent, up from 177,811 boe a year earlier.

Larger companies keen to invest in billion-pound projects simply cannot get the return they're looking for, Sullivan said. The largest gas find in Norway, Ormen Lange, is attractive to the large firms such as Statoil ASA (STO), Norsk Hydro ASA (NHY) and Shell (RDSA) because of its magnitude, Sullivan said.

The maturity of much of the NCS means larger companies are having to look further afield, often in harsher environments, for significant oil and gas finds, and that suits smaller companies like Revus, which can instead target value extraction in established areas.

Strikes on the NCS have impacted on Revus operations this summer. "Production at Veslefrikk was delayed, and that delayed income for us," Sullivan said. "Almost every summer it's a threat," he said.

Revus has a 4.5% stake in the Statoil-operated Veslefrikk oil and gas field, total investment in which amounts to NOK10.7 billion, according to Statoil.

Revus reported its first profitable year in 2005 after three years of operations. In the second quarter of 2006, it reported operating income before financial items and tax of NOK6.9 million, compared with a loss of NOK0.4 million in the second quarter of 2005.

Copyright (c) 2006 Dow Jones & Company, Inc.

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