Strategic Report

 

 

 

 

Strategy Report

 Wintershall Holding GmbH

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepared by Yulia Moiseenko

DHBW Heidenheim, 30.11.12 

Executive Summary

This report represents an assessment of potential strategic change for Wintershall Holding GmbH (a wholly owned subsidiary of BASF) in the fact of a positive economic outlook.

• We expect global economic growth to continue. However, uncertainty on the financial markets will dampen growth prospects. Positive impetus for the Oil&Gas segment will mainly come from the emerging markets, especially from Russia.
• Wintershall’s technological competence, operational excellence and traditional natural gas trading business are the main competitive advantages. The research experience available within the BASF Group offers Wintershall a possibility for differentiation.
• The long-term increase in demand for natural gas in Western Europe, coupled with the decline in the regional production, creates opportunities for our company.
• Membership in WTO helps to improve conditions for foreign investments in the Russian economy. Thus competition for the market share is rising ultimately. Interference from government with parts of the energy sector can affect our independent business significantly. Collaboration with the biggest Russian state company in the segment (OAO Gazprom, gas reserves are estimated at 29 billion cubic meters, i.e. around 70% of Russia's and 18% of the world's gas reserves) appears a useful way of deriving the benefits of gaining market share without the economic and political risk.
• Following strategic choice is offered:

A. Strategy of exiting trading and storage business/ focusing on highly profitable upstream exploration and production activities:  To carry out an agreement on asset swap with OAO Gazprom.

• Wintershall receives 50% plus shares in the blocks IV and V in the Achimov formation of the Urengoi natural gas and condensate field and retains purchasing option
• Gazprom takes over 100% of the jointly run natural gas trading and storage business

B. Strategy of further strengthening of partnership:  To carry out a long-term supply contract with OAO Gazprom.

• Expansion of storage capacity in Germany in order to carry out a long-term leasing agreement with Gazprom
• Expension of natural gas infrastructure in Germany and Europe
• Joint development of Achimov formation in Urengoy, Russia and and the southern North Sea (Netherlands, UK, Denmark)

• Wintershall Holding is divided into two divisions: Exploration&Production (E&P) and Natural Gas Trading. Leadership style assumed in participative role.

• Indicators to measure progress of strategy implementation are following:
• security of reserve/ resource base
• growth of production and strengthening position on Russian market
• development of operation approaches through regional and technological expertise gained in synergy with Gazprom
• delivering medium-term earnings uplift

 

 

 

 

Wintershall Holding GmbH is a wholly owned subsidiary of BASF and has been active in the exploration and production of crude oil and natural gas for over 80 years. Wintershall is Germany’s largest internationally active crude oil and natural gas producer and the first German company that produces natural gas directly in Western Siberia in cooperation with OAO Gazprom, which is the world's leading natural gas company specializing in the exploration, production, transport, storage, processing and marketing of natural gas and other hydrocarbons as well as energy generation. Gazprom is responsible for around 80% of Russian and 15% of global natural gas production.

 

External environment. Uncertainty regarding the development of the national debt crises in the eurozone dampens the growth outlook for the European Union. We anticipate slow growth in gross domestic product (+0.5%) for advanced economies. In Germany, we expect economic growth to slacken considerably (+1.0%); as an export-oriented economy, Germany will be affected by the weak growth of its important trading partners. In the medium term, we expect average economic growth for the European Union of 1.2%. Growth in the emerging economies is more likely to return to pre-crisis rates; whether they will be able to sustain this pace remain to be seen.

Russian market is one of the main focuses of Wintershall. On the back of revenues from oil and gas the economy has been given the chance to consolidate and diversify and Russia has climbed to become the EU’s third trading partner, with growth rates of around 6-7% over the last 10 years and FDI per capita exceeding 3% of GDP, which is a figure comparable to China. It is easy therefore to see why Russia has shed its image of lawlessness and danger and transitioned into a promising and profitable market.

Internal resources. Wintershall know-how is always in demand wherever the highest environmental standards are required and wherever it is technologically particularly difficult. See technological focus in E&P based on BASF know-how in appendix B.

Financial and operation excellence of BASF and its Oil&Gas segment are to be proven by Consolidated statement of cash flows (see Appendix C).

Opportunities. The long-term increase in demand for natural gas in Western Europe, coupled with the decline in the regional production, creates opportunities for our company. We explore and produce natural gas in and around Europe and help to establish the necessary infrastructure to deliver the gas to our customers. With our pipeline network and strategically positioned natural gas storage facilities, we make an important contribution to securing gas supplies in Germany and Europe.

Risks. WTO membership could solve the current problems with the organization on issues such as protectionism, state enterprises, the cost of oil/gas and intellectual property rights; this will mean amongst other things that Russia will provide for improved market access for foreign firms and a much healthier competitive environment domestically.

 

Following strategic choice is offered: 

A. Strategy of exiting trading and storage business/ focusing on highly profitable upstream exploration and production activities.

To carry out an agreement on asset swap with OAO Gazprom ( OAO’s gas reserves are estimated at 29 billion cubic meters, i.e. around 70% of Russia's and 18% of the world's gas reserves)

• Wintershall receives 50% plus shares in the blocks IV and V in the Achimov formation of the Urengoi natural gas and condensate field and retains purchasing option.
• Gazprom takes over 100% of the jointly run natural gas trading and storage business. New established joint venture purchase existing Wintershall Holding’s gas trading companies WINGAS, WIEH and WIEE and shares in the natural gas storage facilities in Rehden and Jemgum, Germany, as well as Haidach, Austria. Full business Joint Venture structure is recommended (See in appendix B).

B. Strategy of further strengthening of partnership

To carry out a long-term supply contract with OAO Gazprom.

• Expansion of storage capacity in Germany in order to carry out a long-term leasing agreement with Gazprom
• Expension of natural gas infrastructure in Germany and Europe through Wintershall’s  participation in construction of Nord Stream (pipeline from Russia through the Baltic Sea to Germany) and South Stream (pipeline from Russia through the Black Sea to southeastern Europe).  Sign stakeholder’s agreement to join Nord Stream Transport AG and South Stream Transport AG.
• Ownership of gas transportation business inside of Russia remains unaffected.
• Joint development of Achimov formation in Urengoy, Russia and the southern North Sea (Netherlands, UK, Denmark), which is now being operated by Wintershall Noordzee

Structure. Three central divisions of BASF, five corporate departments and ten competence centers provide Wintershall Group with services such as finance, investor relations, communications, human resources, research, engineering and site management.

Evaluation. Effective implementation of strategies leads to further strengthening of the strategic partnership with Gazprom and Wintershall’s focus on Russia as a core region for Oil & Gas. Moreover, it significantly increases Wintershall’s resource base.

We expect growth of production in Russia to 220, 000 boepd (80 million boe p.a.) by 2018 and sales volumes in the Natural Gas Trade business sector to increase by 11% p.a.

 

 

 

 

Appendix A. Technological focus in E&P based on BASF know-how.

 

 

 

 

 

 

 

 

 

 

 

 

Appendix B. Full bussiness JV structurte.

Wintershall:

 

 

 

Joint venture:

 

 

 

 

 

 

 

Appendix C. Consolidated statement of cash flows for BASF