Operating income for the first quarter of 2006 amounted to NOK 17,867 million, compared with NOK 11,754 million in the first quarter of 2005.

The first quarter marks another all-time high for Hydro, with record results driven by high oil and gas prices combined with good cost control. Higher aluminum prices and solid operational performance contributed to improved earnings for Aluminum Metal, partly offset by higher raw material and power costs. Higher volumes improved the result for Hydro’s Aluminum Products operations, but increased metal prices had a negative impact on margins. Operating income for the first quarter of 2006 was also impacted by substantial unrealized gains on derivative contracts relating to commercial contracts and operational hedges.

OIL: In March, the Hydro-operated Grane oil field in the North Sea set a new daily production record at 245,000 barrels. (Photo: Helge Hansen)

"Hydro is enjoying record prices for both our energy and aluminum operations, and I am also pleased with our high production for oil, gas and aluminum, as well as our operational performance," President and Chief Executive Officer Eivind Reiten says.

"Capturing value from our enlarged oil and gas portfolio, further strengthening our resource base and improving the profitability for Aluminum are at the top of our agenda going forward."

Oil & Energy

Operating income for Oil & Energy reached an all-time high, amounting to NOK 14,126 million for the quarter. Hydro realized an average oil price of US dollar 60.6 per barrel in the first quarter of 2006, an increase of 31 percent compared with the first quarter of 2005, and 9 percent higher than in the fourth quarter of 2005. Realized gas prices increased 48 percent to NOK 2.17 per standard cubic meter (Sm3) in the first quarter of 2006, compared with the first quarter of 2005.

Oil and gas production averaged 610,000 barrels of oil equivalents (boe) per day during the first quarter of 2006, up 26,000 boe per day from the first quarter of 2005 and an increase of 21,000 boe per day compared with the fourth quarter of 2005.

The Ormen Lange/Langeled project has reached a phase with very high activity levels. At the end of March, the project was 67 percent complete, in line with the schedule and budget. Exploration activity proceeded at a high level during the quarter and Hydro secured new exploration acreage in the Gulf of Mexico, on the Norwegian Continental Shelf and in Denmark.

Aluminum

Operating income for Hydro’s total aluminum activities amounted to NOK 2,384 million for the first quarter of 2006, compared with NOK 1,341 million in the first quarter of 2005.

During the first quarter of 2006, Hydro’s Aluminum  business area was divided into two separate business areas to ensure dedicated management focus on the distinctly different challenges in each area. Aluminum Metal consists of the upstream operations, while Aluminum Products comprises the Rolled Products, Extrusion and Automotive sectors.

Efforts to reposition the upstream business continue. The European smelter system is being restructured to strengthen Hydro’s competitive position, and plans to build a world-class aluminium plant in Qatar are on track. As communicated on Hydro’s Capital Market Day in December 2005, the focus downstream is on cash generation; new investments will be limited and under-performing units will be turned around, closed or sold.

QATAR AGREEMENT: The agreement between Hydro and Qatar Petroleum to establish the Qatalum partnership to build and operate a world-class aluminum plant in Qatar wqs signed in March. From left during signing ceremony: Qatar's deputy PM and energy minister Abdullah Bin Hamad Al-Attiyah, who is also chairman of the board and CEO of Qatar Petroleum, Hydro's president and CEO Eivind Reiten and executive vice president Jon-Harald Nilsen, who is responsible for overseeing Hydro's interests in the project. The plant is scheduled to come on stream in 2009.

Operating income for Aluminum Metal amounted to NOK 2,040 million in the quarter, compared with NOK 1,068 million in the first quarter of 2005. Increased aluminum prices was the main contributor to the improved results for Aluminum Metal. The results were negatively impacted by increased raw material and energy costs as well as costs related to plant closures. Hydro’s primary aluminum production increased to 449,000 metric tons (mt) in the first quarter, 5,000 mt higher than the first quarter of 2005. Hydro's realized aluminum price strengthened 20 percent to US dollar 2,146 per mt in the first quarter of 2006, compared with US dollar 1,783 per mt in the first quarter of 2005. Measured in Norwegian kroner, the realized aluminum price increased by approximately 26 percent.

In March 2006, Qatar Petroleum and Hydro signed an agreement to form a joint venture for the development, construction and operation of a world-class aluminum plant in Qatar (Hydro’s share 50 percent). The signing of the joint venture agreement follows the heads of agreement between the partners, signed in December 2004. Production build-up from the second expansion of the Alunorte alumina refinery in Brazil (owned 34 percent by Hydro) is expected to reach full annual production capacity before the end of the second quarter of 2006. Hydro will participate in a third expansion of the refinery that will increase annual capacity by more than 50 percent.

Aluminum Products' operating income amounted to NOK 452 million for the quarter, compared with operating income of NOK 279 million in the first quarter of 2005. Volumes have improved, but margins are still under pressure. Results in the first quarter of 2006 were impacted by positive metal effects within Rolled Products of NOK 349 million. Operating income also included unrealized gains on LME contracts amounting to NOK 150 million for the first quarter of 2006. In addition, costs relating to the funding of a deficit in a UK defined benefit pension plan of approximately NOK 380 million were charged to the operating income for the quarter. The charge has been reversed by an offsetting credit amount included in Corporate and eliminations for the quarter.

RECORD QUARTER: John O. Ottestad. Executive Vice President and Chief Financial Officer, presented new good quarterly results from Hydro at a press conference in Oslo on Thursday. (Photo: Jo Michael)

Primary aluminum was trading in the range of US dollar 2,500–2,700 per mt in April, and the high aluminium price continues to reflect higher costs to produce aluminium. Financial investors have increasingly invested in long aluminum positions, adding volatility to the LME price, and this situation presents a risk of a significant correction in the market if investor sentiment changes. The outlook for 2006 signals continued global economic growth. Global consumption and production of primary aluminum are expected to increase in 2006 by approximately 6 and 5 percent, respectively, both highly dependent upon developments in China. The growth rates experienced within the rolled products and extrusion markets in the beginning of 2006 have been influenced by a positive pipeline effect as customers have replaced inventories. Margins are expected to remain under pressure as a result of continued increasing metal prices.