Good morning, ladies and gentlemen. Heartily welcome to Statoil's Fourth Quarter and 2010 Full Year Presentation. I wish you all welcome here in the audience in London, and also you participating on the webcast. This press conference goes as a webcast, which means we will, after the presentation from our President and CEO, Helge Lund, take questions both from you present here, and it's an opportunity to use the web for posting your questions. There is a button on the screen where you can tell us your name and pose your question, and we will take that during the session afterwards. With this, I leave the floor to the President and CEO, Helge Lund.
Thank you, Reidar. Good morning to you all, and welcome. Also, good morning to you on the web, wherever you are. You have seen the figures we presented for fourth quarter this morning, and let me go through 2010 and the fourth quarter in some more detail before we dive into a Q&A later. 2010 has been a year of important strategic progress for Statoil, and also a year with very active portfolio management. We have matured five fields and sanctioned another nine projects. We have accessed new exploration acreage, most recently with Sonangol's nomination of Statoil as an operator and a partner in the pre-salt areas offshore Angola. We have strengthened further our position in U.S. unconventional gas by the entry into Eagle Ford.
This is also paving the way for Statoil being an operator within unconventional gas in the U.S. Also, we have executed a very successful IPO of the Statoil Fuel & Retail earlier or at the back end of last year. You have seen also during the year that we have farmed down from our 200% operated positions in Brazil and Canada, demonstrating very good value creation in our international portfolio. As a result, the triple R or the reserve replacement ratio continues to continue to improve and reached 87% for 2010. During 2010, we have also maintained a very high activity level at the Norwegian continental shelf, and I think securing then the foundation for sustained high value creation in this very important area for Statoil.
Production in the first half of 2010 was very strong, but during the second half of the year, we produced less than we had expected, and I will come back to the reasons later in my presentation. We continue to see improved HSE results. We demonstrate through the year 2010 good cost control. We deliver yet another year with strong cash flow and have also proposed an attractive dividend. The proposal to the annual general meeting is NOK 6.25 per share, and that is NOK 0.25 higher than last year per share. In our industry, safe operations are critical. Over the last few years, we have improved our HSE performance, and for 2010, we deliver strong HSE results.
Our serious incident frequency for 2010 was 1.4 incidents per million man-hours, and the HSE improvement is recorded across all business areas. International Exploration and Production, who had no serious incidents in the fourth quarter of last year, is really setting a standard for all our business areas to aspire to as we move forward. This is, in my view, a result of a competent workforce with a strong focus on safe operations every day. I think rather than talking about our performance today, I think we need to focus on how much better we need to be as we move forward as a company in a very demanding industry. We are conscious that even with our 2010 improvements, we cannot rest.
As you know, we had a serious incident in May at the Gullfaks field, the Gullfaks C-06A . We have rightfully been challenged after this, and I want you to know that we challenge ourselves even harder internally. As I mentioned initially, we have produced at a high level for the first half of 2010, demonstrating our portfolio's production potential. I was especially pleased with our operational performance in this period where we were able to utilize our production capacity. During the second half of the year, we experienced specific operational issues, taking the annual production below what we expected.
Production in Q3 was lower than expected because of planned maintenance activities, specific operational issues, and also limitations on our production permits. Moving into Q4, it took more time than planned to get production back to a satisfactory level after the very extensive maintenance period. Together with some operational issues at partner-operated fields in Angola and Azerbaijan, and also some of our own Norwegian Continental Shelf assets, production did not increase enough in Q4 for us to reach fully our updated guiding for the year. We are, of course, working very hard to deal with these issues that led to lower production in the second half of 2010, and I do not see these as systematic, although some of the effects will also influence the production for 2011. Moving to the results.
Net operating income in fourth quarter is NOK 42.8 billion. This is up from NOK 33.5 billion in Q4 2009. Net income is up from NOK 7.1 billion in Q4 2009 to NOK 9.7 billion in fourth quarter of last year. To give you some more insight into our performance of the year, let me comment on the adjusted earnings in the various business areas that you see on this chart. We delivered strong cash flow and a good financial results in 2010 for the year. Fourth quarter 2010 adjusted earnings were up 19% to NOK 40.8 billion.
For the full year, the equivalent number was up 9% to NOK 142.8 billion, compared to NOK 130.7 billion in 2009. We generated NOK 190 billion in cash from underlying operations, and we paid around NOK 100 billion in taxes, 101 billion Norwegian kroner in taxes on adjusted earnings. Also throughout the year, we paid NOK 19 billion in dividends for the year before. In parallel with that, we invested heavily both in Norway and abroad to continue to build more production capacity. Still, we maintain a strong balance sheet and flexibility moving forward. Adjusted earnings from the Norwegian Continental Shelf operation was NOK 111.9 billion. That is up 9% from last year.
I think this demonstrates the value of our assets at the Norwegian Continental Shelf, and we will continue to create substantial value there for many years to come. In 2010, for the year, adjusted earnings for international E&P was up 50% to NOK 13.9 billion. Tax costs are particularly high for 2010 due to specific circumstances and effects that we will cover later today in the analyst presentation. Value creation from our international operations is confirmed by the farm downs in Canadian oil sands and also a 40% farm down on our Brazilian asset, offshore asset, Peregrino. Improving markets together with strong cost discipline are the main drivers behind the strong results. Moving to dividend, our financial performance and developments once more enable us to pay an attractive and growing dividend to our shareholders.
The chart on the slide does not take into account the fact that we paid special dividends for a number of years, so the actual payout ratio was even higher than what you see here on the chart. The ordinary dividend has increased year by year, and the board of directors has decided to propose a cash dividend of 6.25 NOK per share for the annual general meeting, which will take place in Stavanger on the nineteenth of May. This implies that the ordinary dividend will grow by more than 4% from 2009 and implying a payout ratio of 52% of net income.
Looking a little bit into the future that we will comment on more in detail at our strategic update later today, we are publishing new guidance for 2011 and 2012 today. It is based on our experience from recent years and also expected changes in our portfolio over the next two. Our 2010 production of 1.888 million barrels per day forms the baseline from which we will grow. We expect to deliver a compound annual average growth rate of around 3% from 2010 to 2012, and our confidence in this projection is built on the proven resource base. That decline rate develops as we expected and an attractive project portfolio in the execution phase.
The production from 2010 to 2012 will, however, not be linear. For 2011, we expect production to be around 2010 level or slightly below. The reason being very specific factor and issues such as the Gullfaks situation and also production permits that are likely to impact the production throughout the coming year. Natural decline will, of course, take the output from producing fields down, and normally new projects and improved oil recovery would compensate. But based on our asset base and the timing of new projects, the effect is expected primarily to come in 2012 and beyond. Summing up, quickly, 2010, we continued to invest at the NCS and demonstrated again, value creation in operated projects outside Norway.
We have matured our portfolio, accessed new resources and attractive exploration acreage, and also growing our triple R to 87% for the full year. Although we produced at high level in the first half of the year, operational issues challenged our production for 2010. We delivered solid financial results, strong cash flow and attractive dividend, and we maintain a strong balance sheet and financial flexibility to deliver on our growth strategy moving forward. On that basis, we are guiding with an annual average growth of 3% in the period 2010 to 2012. With that, thank you for your attention. I guess we move directly into a Q&A. Thank you.
Thank you, Helge. As you just said, we will then open for questions. To make sure that those participating on the web also hears the questions being raised here in the audience, please wait until you get the microphone from either of the ladies on the side here, then state your name and the media you represent before you present the question. Then we will also see whether questions are coming in on the web. Then I open up for questions. Then silence seems to hit the audience. Yeah, we have one in the back there, please.
Good morning. James Herron from Dow Jones Newswires. I was wondering if you can talk a bit about the Gulf of Mexico. Obviously, it's the restart to drilling operations there has seemed to have been slower than people expected. I don't think any new permits have been issued. Can you talk about how you see activity restarting there, and how you see this impacting on your plans, your production, your developments, that kind of thing?
First, the impact so far on production have been limited, because we have the fields we have operating is by and large operating as planned. The biggest impact on Statoil so far has been the fact that we have delayed a very exciting exploration program, and that we have had to find alternative utilization for the 2 rigs that we have access to in the Gulf of Mexico. It's hard at this stage to be specific as to how or when we will be able to resume drilling. We have a special task force that work diligently to make sure that we are ready when the government are able to open for exploration drilling again.
I do not anticipate that it happens in first quarter. It will probably be later in the year, but I don't dare at this stage to be specific.
Okay. On email, we also obviously get in some questions from the financial market following the webcast. We have here one question here from Selvan Masil in Theorema Funds. His question is: Given your high CapEx in the last few years, which has been above NOK 65 billion, what do you expect your depreciation charge to be in 2012?
Well, we are not guiding on specific numbers on that. I would like to highlight that the increased CapEx level or investment level is not driven by cost. It's actually driven by good projects in Norway and internationally. Actually, we have 13 projects that will come on stream in the period 2010 to 2012, and also a good project portfolio thereafter. This is the key reason for the growth in CapEx.
Okay. We have another question from Roderick Brewis at Argus Media. Are you seeing noticeably more pressure from Petoro to invest domestically? Is your fast-track system for small fields in Norway enough to satisfy Petoro's expectations on investments?
Petoro is a good partner of Statoil, but the fast-track idea is fully developed by Statoil itself. It has created, I think, a huge motivation and push internally in Statoil and motivated our people not only to find smarter solutions, but also quicker and lower cost solution to take care of the smaller fields at the Norwegian Continental Shelf. We already have visibility of smaller projects that will generate as much as 70,000 barrels per day in production. Having said that, I interpret the signals from Petoro also to be very positive to our initiative in this field.
You should be assured that Statoil is only working on projects that are profitable and that meet our hurdle rates.
Okay, we take a question here from the audience at The Brewery.
Hi, good morning. Daniel Fineren from Reuters. Could you tell me where things are with the Shtokman LNG project, whether you still expect to make final investment decision on that this year? Secondly, how does $100 oil change the way Statoil thinks at the moment? I mean, what is the break-even price for the projects you're currently considering?
In terms of $100 oil, immediately it does not change anything in our planning. We are working in an industry where our key output factor has a cyclicality, historically, and will probably be that into the future as well. We of course plan on a totally different number, but we do not announce the hurdle rate. We have, as this is a commercially important factor for us to be inside the company.
Shtokman.
On Shtokman. We are in the process of maturing and completing the technical concept of the project. As you might know, last year, the board of Shtokman Development AG decided to follow a two-tier strategy, where the idea is first to make an investment decision on the pipeline part of the project. Secondly, they will later take a decision on LNG. The board of Shtokman Development AG has indicated that will happen during the first half of 2011, and I have no further sort of information at this stage.
Do we have any further questions here from The Brewery ? Yes, we do. Please you get the mic there, my dear man .
Wanted to know if you can give us a status on the drilling program in Egypt that was suspended due to the unrest. What's happening with that?
We have taken all our expats out of Egypt with their families, so we only have a small representation at the onshore office in Egypt. The drilling we are not drilling for the time being because we are not 100% certain that the supply chain is working as it should under the current circumstances. The activity as it is at a minimum level. I cannot at this stage give any further guidance on that because the situation is rather uncertain.
Okay, we follow up. Please present yourselves so that also the people not being here, hear who's asking the question.
A question from Anne-Grethe Lindberg, Dagens Næringsliv. I wonder if you can say a bit more about what happened on Gullfaks. What went wrong?
Well, maybe that is the wrong angle on the question. In my view, if you look at the Gullfaks field, it has been a phenomenal field for Statoil over decades. We have followed reservoir strategy that is giving very high recovery rates for the Gullfaks field altogether, or the lifetime of that project. We have recently seen that given the situation in the reservoir, we need to look at the strategy and how we are continuing to exploit resources from Gullfaks. Therefore, we have changed and taken the activity level down to make sure now that we do the right steps moving forward. That is the reservoir part of it.
It is not a safety issue as such. It is a reservoir issue and it's an issue about the right way of handling the reservoir. In terms of the well incident back in May, it is duly investigated by ourselves and the PSA, the Petroleum Safety Authority in Norway. Of course, Statoil is following up on the recommendations that are coming from these reports.
Thank you. There's one more there at the back. Yes.
Hi, James Herron from Dow Jones. A number of other oil companies, I think thinking of Exxon and BG Group, have upgraded their gas demand outlooks recently. They are pushing back quite strongly on this notion from the IEA that there's gonna be a global gas glut in the coming years. They think that extra supply could spur additional demand. I was just wondering, what is Statoil's view on the global gas demand picture over, say, the next five to 10 years? Do you think it could grow faster than people are currently expecting?
I will speak about that later in the capital market update, but Statoil takes a positive outlook on the gas market. In terms of the European and Asian perspective, our view is that as the world economy recovers after the financial crisis, we see that the gas demand is increasing. Over the next few years, Asia and Europe will have to compete for the available LNG in the market. That speaks for a more favorable gas market than you have seen in the last couple of years. Based on what we know today, it seems that the U.S., based on the enormous resource base in unconventional gas, will by and large be self-sufficient with gas. A few LNG volumes will go there.
We believe that gas will continue to penetrate more into the power sector, both in Europe and U.S. and even more so in Asia to replace coal as it is more climate friendly. I think also the fact that the resources are abundant and also flexible, I think make people in the power sector more confident that they can trust gas and make long-term investments in terms of using gas in the power sector instead. I think there is huge opportunity in China, specifically as gas currently holds a very small share in the total energy mix in China. Statoil's position is, in my view, a very good one in the sense that towards the European market, we have a fully developed infrastructure.
We are close to the markets in the U.K. and on continental Europe. We have flexible upstream feeds, we have storage, we have access to many liquids points. It's hard to see that Statoil will be the loser, more or less, in any imaginable scenario for gas, moving forward. I think the short answer, the gas is growing, the gas market is changing, and Statoil is very favorably positioned in gas. Let me just remind you participating on the webcast that you have the opportunity to ask questions, and please do so now because I think that we are moving towards the end of the press conference here at The Brewery. If any questions come in, please post them immediately.
I open for any further questions in the audience here. That does actually not seem to be the case. Since no further has come down the web either, I thank you all for participating. I remind you that later today at 12:30 P.M. London time, there will be a broader strategy update from the CEO, Helge Lund, together with the CFO, Torgrim Reitan, and head of the Norwegian NCS operations, Øystein Michelsen. You're all welcome to participate either here at The Brewery or at another webcast then starting 12:30 P.M. London time. Thank you very much for participating. We close the webcast.