Statoil Is Not On An Artic Roll
Extracting oil is never an easy job and neither is balancing the needs of national governments, shareholders and environmentalists. Statoil, the Norwegian oil company, with a majority holding of 67% by the Norwegian government is presently navigating these choppy waters.
The Arctic seemed to offer unlimited riches but the small issue of finding the oil and extracting it is proving more troublesome than first thought. Royal Dutch Shell and Cairn Energy have spent billions of dollars with little or no progress. The permanent ice conditions and extremes of environment make extraction much more difficult and expensive than other areas. Contrast this to the Norwegian Barents Sea, where there is no ice. Statoil, Lundin Petroleum (Sweden) and OMV ( Austria) have all found oil there. Helge Lund, Statoil’s CEO, said “No doubt there is a huge resource potential in the Arctic, but the contrast needs to be made between the workable Arctic and the so called stretch Arctic”. Independents think the “stretch Arctic” would include Alaska though Mr Lund would not confirm this.
At the same time the Norwegian government is trying to stem a decades long drop in oil production by increasing exploration in the Barents Sea. It plans to sell 72 licenses this summer for exploration blocks as well as opening up its first new acreage in two decades after resolving a 40 year old border dispute with Russia. Statoil has made some of the biggest discoveries in the past few years. Off the eastern coast of Canada it found 2013’s biggest; the Bay du Nord.
This presents a quandary for Mr Lund who despite Statoil having a target of increasing production says he is not bound by the goal. He is focused on value, not volume. This chimes with the discomfort of shareholders who have seen the oil companies spending heavily to replenish depleting reserves and boost production. With not enough cash being generated to cover capital expenditure and dividend payouts, investors have been pressuring them to show more capital discipline.
In June 2013 Statoil postponed construction of a $15 Billion Arctic oil hub, 1500km from Oslo. Reasons cited for this were costs of the infrastructure, uncertainties on the amount of oil in the Johan Castberg field which was estimated at 400-600million barrels as well as Norwegian government tax increases. Other projects on hold include the Bressay heavy oil development in the UK North Sea costed at $5.5 billion. In December 2013 it announced it was selling its 10% stake in the Shah Deniz 2 natural gas project in Azerbaijan for $1.45 billion. The company has also increased its 2013 dividend payment to $1.13, a 4% increase on 2012. As well as this dividends will now be paid quarterly.
The new direction for Statoil of restricted capital expenditure and more focused spending could see it losing out to its competitors as could the Norwegian Sovereign Wealth Fund.
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