WHAT'S AHEAD IN 2000

Investing in core assets to produce sustainable high returns

Rolf Magne Larsen, Senior Vice President, International E&P, Statoil, Stavanger, Norway

In early 1999, Statoil adjusted its organizational structure to better reflect its main strategic directions. Five business areas were established and given the following objectives:

• E&P Norway – Increase profitability and strengthen the group’s role as the leading operator on the Norwegian continental shelf (NCS).
• International E&P – Develop profitable international upstream activities from quality projects in selected core areas.
• European Gas – Strengthen Statoil’s position in the European gas market.
• Retailing & Nordic Energy – Develop a regional energy company covering Nordic countries.
• Industry & Trading – Strengthen profitability and competitiveness in downstream operations.

This change represented one of several measures aimed at boosting Statoil’s performance, which was perceived to be falling increasingly short against comparable oil companies.

Among other elements in this program to close the performance gap and prepare Statoil for a possible stock exchange listing in 2001 is a focus on core activities and assets, including the necessary restructuring. Also coming will be a general reduction in administrative and support costs, reduced levels of investment and exploration and a more proactive approach to de-merging parts of the business as joint ventures. One consequence is that Statoil is adjusting its growth ambitions to its financial capacity by focusing on markets and business segments in which the group ranks as, or can become, a leading player.

International E&P increased its share of the group’s production during 1998 from 10% to 15%, and its share of corporate reserves from 16% to 22%. Its target remains to increase production outside Norway, from the present level of 90,000 bopd to more than 300,000 bopd. To enhance value creation and improve profitability, however, new investment opportunities will have to be robust against lower oil prices in the range of $12 per bbl.

Following several years of testing a number of opportunities that mainly became available as a result of political liberalization or technological progress, Statoil began to focus its expansion on core assets two years ago. The need to adjust the group’s growth rate and to improve its financial results added some urgency to this process.

Over the past two years, Statoil has ceased activities in Namibia and Australia, decided not to compete in Brazil and has sold its producing asset in Thailand. The company has concentrated on deepwater areas in the Gulf of Mexico, focused exploration off the British Isles on the Atlantic Margin and, recently, turned down short-term business opportunities in China and Russia.

Core assets are basins or markets in which Statoil has or can develop distinctive advantages, is or can become a leading player and can develop a material and sustainable high-return business. A prerequisite is that the group can conduct its business in accordance with its ethical values, thus determining its own destiny. Success will depend in part on developing close relations with government authorities, national oil companies and local suppliers.

The Caspian, particularly Azerbaijan, continues to be at the center of industry’s attention, and Statoil has achieved some exciting results over the past year. Exploration drilling in the Shah Deniz license has revealed a huge gas / condensate accumulation. Also, a third production sharing agreement (with Statoil participation) covering the Alov area has been ratified by Azerbaijan’s parliament.

Construction of the Western Route pipeline to Supsa in Georgia means that production from Azeri / Chirag has not been affected by the shutdown of the Northern Route through Chechnya. However, the first phase of Azeri / Chirag full-field development is experiencing delays due to a desire to reduce the effects of low oil prices by pushing development costs down, and to problems in deciding upon a route for the main export pipeline. The latter is now on the critical path.

With the Shah Deniz discovery, prospects for exporting gas from Azerbaijan also have been broached. Statoil has offered to assist the Azeris in replicating Norway’s gas experience, including the development of a local gas industry.

Deepwater Angola has been confirmed as the world’s premier exploration hotspot through the ultra-deepwater bidding process (in which Statoil won participation, with operator BP Amoco, in a production sharing agreement covering part of Block 31) and through a continued string of exploration drilling successes. These have added additional reserves to the already huge volume of discovered oil.

Tough commercial terms, deep water and variable oil and reservoir qualities present challenges to the oil companies developing these reserves. Also – given the need to demonstrate a resistance to low oil prices, to find environmentally acceptable solutions for associated gas and to avoid post-sanction cost overruns and delays – it is not surprising that one- to two-year delays are being experienced in overall pre-sanction development plans for Block 17, operated by Elf, and Block 15, operated by Exxon. Following a bumpy start, the Girassol development in Block 17 now seems to have entered a smoother passage toward first oil in late 2001.

On land, the peace process has grounded. The internationally recognized government may attempt to arrive at a military solution. It is my hope that the international oil industry will accept a more proactive responsibility than has been achieved in the past for bringing short-term benefits to the people of Angola from offshore operations in terms of jobs and local content.

In Venezuela, international investors are cautiously observing moves by the new administration. Indications are that existing contracts will be honored, but that new projects will be affected by the legislative changes currently in preparation. The experience of most foreign oil companies in executing existing projects is such that any negative changes in terms and conditions will seriously affect their desire to take on new commitments.

However, I believe there is a potential for accelerated development by local players in the oil and gas industry. But this should be stimulated by incentives rather than being forced on the international investors.

In Vietnam, Statoil is optimistic that the Nam Con Son basin gas project will finally be launched, with BP Amoco as operator. Gas pricing was settled earlier this year, and other agreements have being concluded. Plans call for gas to be landed in early 2002, but that means that there must be no further delays before project sanction. This is expected in December.

The Middle East is emerging as a new opportunity for international investors, as well as a threat to countries presently attracting such capital. Statoil’s distinctive capabilities in reservoir management, execution of large projects and gas treatment, and its ability to cooperate with other national oil companies, should put the group in a favorable position to compete.

Exploration drilling results during the next 12 months off Kazakstan, in the Gulf of Mexico, on the Atlantic Margin (including Greenland) and off Nigeria will be crucial in determining the future potential for Statoil in these basins.

For Norway, the question of whether the government will decide to merge its oil and gas interests is perhaps the most crucial issue affecting the future potential for value creation from the nation’s oil and gas investments.

Statoil is wholly owned by the Norwegian state, which also has a direct financial interest (SDFI) in national petroleum operations. SDFI holds an average of 30% in licenses issued on the country’s continental shelf, making it by far the largest "oil company" in these waters. Statoil, with holdings roughly half this size, acts as manager for SDFI. The Statoil board has proposed to the government that the state should merge the group and SDFI, both to enhance value creation from the state’s holdings and to create a larger Norwegian oil company that can be more competitive internationally. Statoil can accept full operational and commercial responsibility for SDFI without expanding its organization.

In addition, the board has recommended that the proposed merger be followed by a partial privatization and stock market listing of Statoil.

The government plans to present a White Paper on these issues early next spring to the Storting (parliament), which is expected to reach a decision before its summer recess.

Rolf Magne Larsen leads Statoil’s international upstream business unit, one of the 15 Strategic Business Units that make up the Statoil Group. In this capacity, he is directly responsible for all of Statoil’s E&P in 16 countries outside Norway. In 1977, he graduated from the Norwegian University of Technology in Trondheim with an MS degree in geology. He began his career with Statoil in 1978 as a staff geologist, rising to prospect evaluation manager for Norway in 1981. In 1985, Mr. Larsen was promoted to chief geologist. He subsequently attained the positions of vice president (1990) and senior vice president (1990) for exploration in Norway. In 1992, he was appointed to his present position. Mr. Larsen also sits on a number of Statoil management boards, both internal (other strategic business units) and external (subsidiary companies).

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Copyright © 1999 Gulf Publishing Company