Hydro: Industry Capacity Constraints Causing Delays in Production Growth

Norsk Hydro

Hydro is well-positioned for long-term profitable growth in its energy, upstream and aluminum operations but industry capacity constraints delay oil and gas production growth, the Norwegian-based company said at its Capital Markets Day. Growing Hydro's oil and gas resource base, pursuing upstream aluminum growth opportunities and maintaining cost control remain top priorities, together with completing the Ormen Lange gas field development for start up 1 October 2007. Hydro expects most of the ongoing restructuring of downstream aluminum to be completed by end 2007.

"Hydro is stronger than ever. Our technology, competence and financial strength, together with a broader portfolio of development and exploration projects beyond 2010, give me great confidence in our strategy for future growth," said Eivind Reiten, Hydro's President and Chief Executive Officer. "We are maneuvering in an increasingly challenging global landscape but our talented organization, proven project execution skills and our experience in cooperating with partners are more valuable than ever."

Hydro's Capital Markets Day presentation includes the following highlights:

  • Hydro targets 2007 oil and gas production of 605,000 boed (barrels of oil equivalents per day).
  • Hydro expects oil and gas production to reach 700,000 boed in 2010.
  • Continued high exploration activity with Hydro participating in approximately 60 exploration and appraisal wells in 2007.
  • Hydro expects production costs in 2006 to be NOK 25 per boe and the target for 2007 is NOK 28 per boe, both excluding gas injection costs. From 2007 onward, production costs are expected to stabilize somewhat below NOK 28 per boe.
  • At the end of 2006, Hydro's expected oil and gas reserves from sanctioned projects are estimated at about 2.7 billion boe. Expected additional resources from non-sanctioned projects are estimated at 1.2 billion boe. The expected combined resource base is 3.9 billion boe, up 120 million boe from the end of 2005.
  • Primary aluminum production is expected to be 1,730,000 tonnes in 2007 and 2,000,000 tonnes in 2010.
  • Divestment of Hydro's 49-percent share in Meridian Technologies for NOK 0.6 billion and divestment of Automotive Castings for NOK 3.7 billion, representing key steps to reduce engagement downstream aluminum.
  • Investments and exploration expenditures in 2006 will amount to NOK 28 billion, NOK 2 billion below previous estimates.
  • Investments and exploration expenditures in 2007 are expected to be NOK 30 billion, of which NOK 4 billion in Aluminum Metal and NOK 24 billion in Oil & Energy, including exploration expenditures of NOK 6 billion.
  • Hydro is considering public listing or divestment of its petrochemical business, Hydro Polymers.

Growth from rich portfolio of oil and gas development projects and exploration acreage

New fields coming on stream in 2007, including Ormen Lange, Dalia, Rosa and the Independence Hub area, contribute to the production growth. The upgrade of Terra Nova during 2006 will ensure stable production in 2007. Proactive follow-up of partner-operated fields will be an important element in Hydro's efforts to meet the 2007 production target.

Hydro's oil and gas production growth will come from a well-defined and robust portfolio where plateau production from new fields coming on stream by 2010 adds up to 200,000 boed, with the fields peaking in different years. The Peregrino field in Brazil, where Hydro has a 50-percent ownership interest, is expected to start production in 2010 and reach plateau production with approximately 100,000 boed in 2011 on a 100- percent basis.

Production for the years through 2010 is expected to be lower than previously estimated mainly because of industry capacity constraints affecting production uptime and resulting in postponement of development projects. The 2010 forecast is based on Hydro's existing oil and gas portfolio, and 90 percent of the new fields contributing to the growth are already sanctioned.

Beyond 2010, prospects for further production growth are good. Hydro's extensive portfolio includes, among other projects, the Troll Future Development and the Vega and Peon fields in Norway.

In 2006 Hydro stepped up its exploration activity. By early December 25 of 47 completed wells have resulted in commercial discoveries. During 2007, Hydro plans to drill approximately 30 exploration and appraisal wells in Norway and approximately 30 internationally. Rig capacity has been secured in Norway until 2009 and in the US Gulf of Mexico until 2013. During 2006, Hydro has acquired new, attractive exploration acreage in the US Gulf of Mexico, Norway, Denmark, Canada and Brazil.

Aluminum Metal on track to reposition and grow

Demand for primary aluminum is expected to increase by 15 million tones, or about 4 percent annually, by 2020. Rising costs is an industry challenge but the increase has been more than offset by higher aluminum prices. Restructuring of Aluminum Metal is on track with approximately 110,000 tonnes of annual capacity to be closed down by the end of 2006 and during 2007, thereby completing the closure program of 180,000 tonnes of high-cost primary production capacity. The measures will significantly improve Hydro's smelter cost position. Hydro is well positioned with long-term power contracts extending up to 2020 and alumina equity coverage increasing to 75 percent in 2010. Operational excellence remains a top priority.

Hydro is pursuing a number of growth opportunities in alumina and metal. The planned Qatalum smelter, a 50/50 joint venture between Qatar Petroleum and Hydro, is on track with construction start scheduled for fall 2007 and start-up of production in late 2009. The capital expenditure estimate has been increased from USD 3 billion to USD 4.5 billion, on a 100- percent basis, as a result of general cost increases for key materials and construction, a weaker USD/EUR exchange rate as well as design changes. Final cost estimate and build decision are scheduled for summer 2007.

Executing Aluminum Products portfolio restructuring

Cash generation in Aluminum Products has been solid during the first nine months of 2006, but profitability remains unsatisfactory. Operational improvements have been achieved in most areas, and the outlook for Extrusion and Building Systems is good. In addition to the agreements to divest Automotive Castings and Meridian Technologies, the process for divesting Automotive Structures has started. Hydro's magnesium plant in Canada will be closed during first half of 2007, and the remaining magnesium remelting plants will be divested. Rolled Products delivers consistently strong cash flow, but industrial challenges remain.