Discontinued Oil and Gas Business

Agreement with LetterOne

On September 27, 2018, BASF and LetterOne signed a definitive agreement to merge their oil and gas businesses in a joint venture, which will operate under the name Wintershall DEA. In 2017, the combined business of Wintershall and DEA had pro forma sales of €4.7 billion, income from operations before depreciation and amortization (EBITDA) of €2.8 billion and net income of €740 million. Closing of the transaction is expected in the first half of 2019, subject to the approvals of merger control and foreign investment authorities as well as mining authorities and the German Federal Network Agency. Until closing, Wintershall and DEA will continue to operate as independent companies.

The signing of the agreement has an immediate effect on the reporting of BASF Group: The sales and EBIT of the oil and gas business are no longer included in the respective figures for the BASF Group – retroactively as of January 1, 2018, and with the prior-year figures restated. Until closing, the Wintershall Group’s income after taxes will be presented in the income after taxes of the BASF Group as a separate item (income after taxes from discontinued operations). The assets and liabilities of the oil and gas business were reclassified to a disposal group as of the end of the third quarter of 2018, and have since been presented under Other. Depreciation and amortization of its assets and accounting according to the equity method were suspended from the signing date onward.

The gain from the change from full consolidation to the equity method will be shown in income after taxes from discontinued operations on closing. From closing, BASF will account for its share in the joint venture Wintershall DEA using the equity method and include its share of Wintershall DEA’s net income in EBIT before special items and EBIT for the BASF Group (reported under Other).

Significant developments

BASF’s oil and gas activities are bundled in the Wintershall Group. We focus on exploration and production in oil and gas-rich regions in Europe, North Africa, Russia, South America and the Middle East – core regions in which Wintershall has a high level of regional and technological expertise. We are also active in the transportation of natural gas in Europe with our Russian partner Gazprom.

Europe: In March 2018, we started operation of the first development project operated by Wintershall in Norway at the Maria oilfield in the Norwegian Sea. In addition, the Norwegian Ministry of Petroleum and Energy approved the development and operation plan for the Nova field (previously: Skarfjell) operated by Wintershall, which is scheduled to start production in 2021. Production at the Aasta Hansteen gas field in the Norwegian Sea, which is operated by Equinor, started in 2018. A Wintershall exploration well discovered another gas field near Aasta Hansteen and we are now investigating the possibilities of developing this find. In Germany, we successfully completed a 3D seismic survey at the Emlichheim concession in 2018 with the aim of maintaining the crude oil production plateau at the site, which has been in operation for over 70 years.

Russia: Achimgaz, a joint venture of Wintershall and Gazprom, celebrated its 15th anniversary in 2018 and achieved a new milestone, with total production reaching 30 billion cubic meters of natural gas. We are drawing on the experience gained with Achimgaz to drive forward the development of Blocks 4A and 5A of the Achimov formation in the Urengoy field in western Siberia in a joint venture, Achim Development.

Middle East: Wintershall will invest in oil and gas production in Abu Dhabi. An agreement to this effect was signed by Wintershall and the Abu Dhabi National Oil Company (ADNOC) in November 2018. Wintershall’s 10% interest in ADNOC’s Ghasha concession marks its entry into natural gas and condensate production in Abu Dhabi. According to ADNOC’s planning, the project will start producing around the middle of the next decade, with initial daily production volumes expected to exceed 40 million cubic meters of natural gas.

South America: Wintershall was awarded seven offshore exploration licenses in Brazil’s 15th oil and gas licensing round. The company will hold the operatorship for four of these licenses. Initial exploration activities in the allocated blocks will start in 2019. In Argentina, Wintershall Energía celebrated its 40th anniversary in 2018 with total production of around 26 million barrels of oil equivalent (BOE) per year. Shares in the Aguada Pichana Este concession in Argentina were sold on January 23, 2018.

Natural gas transportation: Pipe-laying work for the Nord Stream 2 pipeline project, which Wintershall is co-financing, started in 2018 and is progressing as planned. The European gas pipeline link (EUGAL) project – the connecting pipeline for Nord Stream 2 – is being implemented by GASCADE Gastransport GmbH as the lead developer. All of the necessary planning approvals have been issued and construction is on schedule.

Business development

Sales to third parties from our oil and gas activities were increased by €842 million year on year to €4,094 million in 2018. This was mainly due to higher prices. We also increased volumes, while currency effects had an offsetting effect.

The price of a barrel of Brent crude oil averaged $71 in 2018 (previous year: $54). Gas prices on the European spot markets rose by 32% compared with the previous year.

Income from operations (EBIT) before special items increased by €1,062 million to €1,745 million. In addition to higher oil and gas prices, we recorded volumes growth in Norway and Russia. EBIT rose by €798 million to €1,733 million. Depreciation and amortization of assets was suspended as of the end of the third quarter of 2018.

The tax expense rose following the improvement in income from operations. At €829 million, income after taxes from discontinued operations was €69 million above the prior-year figure.