The elephant man

06.01.2015
Philip Lambert is open about the need for the oil and gas industry to fight its corner harder. But Norway is nevertheless where this highly-regarded financial adviser would put his money.

| Bjørn Rasen and Andrew Parker (photos)

Philip Lambert

Philip Lambert

 

An imposing but anonymous facade in London’s fashionable Mayfair fronts the offices of Lambert Energy Advisory Ltd and its 20 or so analysts and advisers. Nestling among three others, a small brass plate is the only external sign of a company which works closely with a number of major global players on big strategic processes involving mergers and acquisitions in many parts of the world.

Lambert himself was a key adviser to the Norwegian government when Statoil secured a stock market listing in 2001 and management of the state’s direct financial interest (SDFI) was eventually transferred to Petoro.

The day we meet him, he is standing on the pavement outside and guiding passers-by through a cluster comprising himself and his office neighbours in jovial conversation.

But he can be pretty direct in his view on tax. “This is a sort of ‘elephant in the room’ which nobody talks about, but the fact is that across most of the global economy now, tax rates are coming down.

“People want to encourage high-tech business, or indeed any business, in their economy. The only sector where that philosophy hasn’t remotely permeated is oil and gas, where tax rates across the world average 70 per cent or more.

“In any other industry, that would have been considered punitive. You can’t debate cost in isolation from the biggest cost of the lot.”

Costs are indeed the challenge, and are currently too high for exploration. So it is high time to hold a new debate about the industry’s terms, says Lambert.

The companies must also look themselves in the eye, he adds, and finds it amazing that the industry is pleading almost the same poverty now that it did when the oil price was nine times lower. “Cost have admittedly gone up. But my view is that they will go down again through the workings of supply and demand, just as they have done earlier with rig rates.”

He maintains that the efficiency improvements and discipline now being signalled by the industry will help to do the job. But the biggest cost of all is not wells or equipment, but tax.

Lambert is often described as “the quiet man in the wings” – the person who provides the crucial strategic advice. He seldom gives interviews, but promised to meet me after a brief but pleasant chat immediately after he spoke at the ONS conference in Stavanger during August.

The starting point for his presentation was where and why he should consider investing USD 1 billion for his hypothetical Great- Aunt Gwendoline.

Virtually the whole petroleum industry has started to retrench since then, some companies more than others. So the first question is whether Lambert’s thinking remains unchanged.

“If you allow a few weeks of oil price volatility to change your view, then you shouldn’t spend your USD 1 billion in oil and gas anyway. You should choose another industry or put it in the bank and earn one per cent interest.

“The whole point of investing in oil and gas is that you’re taking a 30-year view. It’s a quirk of human nature that the short term becomes the long term in people’s thought processes. But that’s precisely the best way of losing money.

“The secret of investing in oil and gas is using the short term to your advantage. When it’s creating panic and gloom and despair, that’s the very best time to invest. We see clear signs of panic and despair this autumn. So yes, I’d still spend Auntie’s billion dollars on the NCS.”

Lambert looks to the underlying conditions. The big question many ask – and which few or any can answer, regardless of how many millions of words are written on the subject of oil prices – is whether Saudi Arabia has changed its oil policy.

“It was the same question we asked in Norway in 1999-2001, when oil prices had dipped below USD 10 per barrel: what was the Saudi Arabian oil policy.

“We also asked what the Russians needed to keep their economy going, and what the head of ExxonMobil or Shell felt was required to keep an independent oil company (IOC) solvent and investing.

“Out of that mix came the answer that the oil price should be USD 20-25. So, even if the price was USD 10, we were happy to plan for a price of USD 20-25.”

 

"He notes that the oil price on the day we meet is USD 83. There’s gloom and Armageddon. You have to put it in the perspective."

 

“I think it’s more likely to be a short-term problem than a 20-year one.”

Lambert Energy takes the view that oil and gas will remain the primary energy sources over the next 20-30 years. In addition comes coal.

According to Lambert, the world uses energy corresponding to 250 million barrels of oil equivalent (boe) per day, broken down into 90 million oil, 60 million gas and 70 million coal. Nuclear power and renewables account for the rest.

What Lambert calls the “green noise about renewables” contains constant demands to replace oil. “Doing this with biofuels has been a profound failure, simply causing massive environmental damage across the world. It’s not going to work.”

In his view, gas is the only alternative to some of the 90 million oil barrels consumed every day. Part of the transport sector could convert to this fuel. But he asks rhetorically whether gas might lose market share.

“That’s what’s happening in Europe because coal is much cheaper, and in the very countries which say they’re concerned about climate change. So they talk one policy while burning the fuel which adds to the problems.”

He thinks gas will increase its market share, particularly if it tells its story in the right way. Gas is part of the solution rather than the problem, he says, in a clear counter to sections of public opnion in Norway.

“We think renewables are going to struggle because they’re still extremely expensive. And the people who have to pay for most of that are the poorest in our community.”

 

Philip Lambert

Environmentally aware.
If people are really interested in reducing carbon emissions,
they should work hell for leather at replacing coal with natural gas, says Philip Lambert.

 

Americans currently pay about USD 30 per boe for energy, while renewable European supplies cost around USD 150. Lambert is dubious about claims that solar power has become competitive with oil and gas.

“Well, fine, if it is then it doesn’t need a subsidy. None of the renewables can survive without a subsidy. Show us the calculations so that people can compare for themselves. A realistic debate needs openness about the real cost of different energy bearers.”

He emphasises that the potential of the NCS has not been fully realised, which is why Norway has always been a good place to invest.

And he praises the transfer of substantial assets from Statoil to Centrica and Wintershall at prices perceived by the market as fair to both buyer and seller. That is one reason why people are reshaping their view of the NCS and its opportunities.

History repeats itself. When Lambert worked for Norway’s Ministry of Petroleum and Energy in 1999, a prevailing view existed that the NCS was ultra-mature and that its prospects were not of the best.

“I just thought that this had to be wrong. In 1999, 750 exploration wells had been drilled since the beginning. That couldn’t be enough to show if the NCS was mature or not.”

He recalls that the debate in the UK was the same around 1985. Its continental shelf was widely regarded as very mature, and people thought it would all be over in a decade.

Then, in what Lambert calls the second phase, a number of big discoveries were made which created another production peak in 2000.

“I felt in my bones that writing off this province as having no upside and not being worth exploring was a complete misperception,” he says of Norway.

“But it needed everybody to shift gear, with the operators wanting to explore again, different views being taken, new eyes coming onto the NCS.”

He believes a turning point for the country came in 2005, with the introduction of the tax credit for exploration, and says this transformed everything.

Smaller companies, with new ideas, benefitted from the tax shelter and could drill new wells with high risk. Without the opportunity of the credit, they would not have gone ahead.

Lambert says the scheme has been a success for Norway, and notes that the Johan Sverdrup discovery was a result of the new exploration regime.

 

"I hear people writing off the Barents Sea, and that’s absolutely crazy. How can you write it off when you’ve only drilled just over 100 wells?"

 

“This is a huge area of sea and you got a result over the disputed zone with the Russians. This area and that close to it could have a massive hydrocarbon potential.”

He likes to regard the government and its agencies as trustees for huge assets and the companies as fund managers for handling this wealth.

In his view, the fund managers were not structured in 1999 to optimise the value. Statoil had to be strengthened as well as several other players.

The mould was broken in 2001, when first Paladin and then other independents were admitted to the NCS. This was followed by a restructuring of the state’s holdings, with Statoil part-privatised and Petoro created to manage the SDFI.

“Both trustee and fund managers must work in the right way,” observes Lambert. “And it’s in the everyone’s interest to land the big fish out there, whether Lundin, Det Norske or Statoil do it.

“I think there’s a spirit in Norway saying ‘let’s go out and find these fish’, and I want my billion dollars from Great-Aunt Gwendoline to be unleashed there.”

Asked whether the trustees (governments) should both invest and tax less in the exploration phase, Lambert prefers to stress the burden of the petroleum industry’s battered reputation on future development – its weakened position in the public arena means that few dare to enter the debate.

“We allow the world to be so rude about us and, to be honest, so dishonest. Some of the things said about our industry are plain wrong.

“What would happen if suddenly the entire oil and gas industry went on strike, and 150 million boe per day were suddenly not there?

“We’re talking about catastrophic impoverishment of the entire world. We couldn’t survive if we were plunged back into mass global deterioration in health, welfare and everything else.”

The future rests on petroleum, he says. “The greens would have us believe that we can shun the oil and gas industry. But they can provide only five million boe of the 250 the world needs every day from wind and solar, at a cost of USD 150-250 a barrel.”

Lambert believes the problem is that the industry has allowed itself to be pushed increasingly into a “embarrassment corner”, instead of fighting for what it represents and contributes. The result of this passivity has been overtaxation.

 

"Tax is getting in the way of investment and decent margins, and margins aren’t a pre-tax issue but a post-tax issue. So this is a post-tax debate, and we are not having it."

 

Philip Lambert and Bjørn Rasen

Blunt message.
Philip Lambert wants tax to function as an incentive for increasing value creation even further – including in Norway. “When future generations look back at the NCS, they’ll ask how it proved impossible to reap more than 50 per cent of the oil and gas in place,” he says.

 

He maintains that the thinking behind his tax proposals are not about being philanthropic to the oil companies as such. “It’s simply a matter of economics.”

Norway relies on its oil and gas revenues. Without investment, tax receipts from this source will ultimately plunge. If taxes are too high, people will disinvest. That is what Lambert now fears.

“There has to be a debate in the industry. In certain countries, the tax rate is 90 per cent. That’s too high in today’s circumstances.”

He notes that such rates were set when the industry was in a different phase and a lot of the fields were incredibly profitable.

Companies in many areas are into the second or third development phases, which tend to involve much more complexity, deeper water, greater distance from land and thicker ice – so costs just go up.

“And the world is still using 150 million barrels, day in and day out. Governments have to recognise what the industry is trying to do under increasingly difficult conditions.”

Lambert says that the NCS is in a new and more mature phase, and that recovery factors now represent the big challenge. They currently average 46 per cent of reserves originally in place.

 

"When future generations look back at the NCS, they’ll ask how it proved impossible to reap more than 50 per cent of the oil and gas in place."

 

I think that’ll be a justified question. “The issue today is therefore how to create a tax regime which encourages that recovery rate to move up to 60 per cent or more in complex fields. Norway has led the way on reserve recovery. Does the government want that to continue?”

But he does not think tax is the biggest mistake being made by Norway at present. “Before you have a tax debate, you should have an open discussion about what the oil and gas industry stands for.

“If you stick with the belief that what we’re doing is wrong, you’re never going to secure support for reducing taxes for our industry.

“Punishing the tobacco industry is one thing, but doing the same to an industry producing well over half the energy the globe needs to survive strikes me as a very very odd thing to do – also from a climate perspective.”

Lambert finds the climate debate is coming up with the wrong solutions, and feels that many who say they are concerned with temperature change are much more interested in the idea of renewables or in hitting the oil and gas industry.

“If you’re really interested in carbon reduction, it’s very simple. You’d just go hell for leather to replace coal from the market place with gas.

“That can be done quickly, realistically and without crippling the poorest members of our community with persistently high energy costs.”

 

Philip Lambert

In a better light.
Philip Lambert wants greater recognition from governments and the
general public of the contribution made by the petroleum companies
in securing the 150 million daily barrels of oil and gas on which the world depends.

 

The petroleum industry is very important in global terms. And it is important for Norway. Lambert is astonished people have forgotten “that this amazing industry has created huge wealth for Norway – without destroying the environment”.

What he calls the misperceptions about the industry are not special to Norway, and points to UN secretary-general Ban Ki-moon, whose main job is reducing world poverty.

“He’s recommended disinvestment in fossil fuels, without any distinction between gas and coal. That’s incredibly dangerous from a man in his position, because he’s nothing to put in its place except mass impoverishment.

“I heard a left-wing commentator say recently that the energy industry, not the medical profession, has had the greatest impact on reducing infant mortality globally.”

 

"Nothing has transformed people’s lives more than access to affordable energy."

 

Lambert considers Statoil to one of the best industrial companies world-wide, regardless of sector. “It stands for high levels of ethics and environmental protection as well as value creation – and now also internationally.”

He says that Statoil and other oil companies contribute positively in a number of areas which are seldom mentioned. Their workforce is multinational, with people from all over the world collaborating over joint tasks on a daily basis.

They think and speak globally. “But I’m not sure that we talk well enough across genders, because there still aren’t enough women in the industry.”

A natural question to ask Lambert is whether the world is trapped in a form of Catch 22 – producing and consuming the energy needed to maintain prosperity but then polluting more than the planet can cope with, or cutting energy supplies.

“I’d very much challenge that thinking,” he responds. “The term ‘pollution’ is one which needs a genuine debate. Talking about ‘fossil fuel’ is like lumping all vegetables together. Again, we need to distinguish between gas and coal.

“In China today, more than 600 million people can’t breathe properly. That’s never happened before in human existence. It’s nothing to do with carbon dioxide, but with sulphur dioxide and nitrogen oxides. And gas doesn’t produce them.”

He points out that if we had been sitting on a bench in London 50 years ago, we would have been covered with soot and probably unable to see each other through a “peasouper” fog. “We displaced coal with gas in this city and look what happened.”

A lot of pills are prescribed for creating a cleaner world. Lambert admits that many are well intentioned, but the challenge is to get them also to function economically.

“We’ve got to find a pill that works. We have one in our industry, and it’s called gas. The ultra greens don’t want it because it doesn’t cure the world fully. If I were a patient offered the choice between getting mostly better or becoming worse, I’d have taken the first option.”

He urges the political system in Norway to start recovering its pride in the industry, and particularly in Statoil. “Once that recognition is established, the necessary measures to ensure that oil and gas can continue giving a good return would follow.”

 

Philip Lambert