Combined technology strengths drives StatoilHydro’s expansion plans

Combining Statoil and Norsk Hydro’s stakes, StatoilHydro holds 23.33% in Angola’s golden block 17, where first production came from theGirassol FPSO in 2001. (Photo: Øyvind Hagen/Statoil)

Helge Lund, president and CEO of the new company, held the same positions at Statoil, while Eivind Reiten, who remains president and CEO of Hydro, is chairman of the new company’s board. StatoilHydro has around 31,000 employees and a presence, including downstream operations, in nearly 40 countries. In production volumes, it claims to be the world’s leading offshore operator.

Separately, the two companies each have secured valuable international assets, offshore and onshore. Both have stakes in Angola, including golden deepwater block 17; in the US Gulf of Mexico (where both were awarded new acreage in the recent licensing round); Libya; and Brazil.

Statoil has production in Algeria, Azerbaijan, and Venezuela, among others, while Hydro has producing assets in Canada, Russia, and the GoM. Including exploration interests and several development projects in the Americas, Africa, and Asia, StatoilHydro starts life with an international upstream presence in 20 countries.

Prior to the merger, cooperation between the two companies was limited by legal and regulatory restrictions. Once the union is effected, however, StatoilHydro can start planning in earnest how it will deliver on its promises.

Going global

Peter Mellbye, executive vice president for International Exploration and Production at SatoilHydro, believes the merged company’s long-term future will be secured on the global stage.

“I think it’s very clear to everybody that the future of the new company is not only building on activities in Norway. To build such a company you need to succeed internationally,” he says.

“For Statoil, it has been a long process for us as an organization to realize that the international part is for real. It’s not a sideshow, but a game of survival, and I think this merger almost finalizes that change process.”

StatoilHydro has production of around 1.7 MMboe/d - a significant volume in international terms - and has proven reserves of 6.3 Bboe. Only 300,000 boe/d of its output comes from outside Norway. That is a proportion the company will be seeking to change in coming years.

As Mellbye points out, just to replace current production calls for close to 700 MMboe to be added to reserves each year. And even though a high level of investment will continue be made in Norway, realistically, international sources will have to supply the new volumes.

Fortunately, StatoilHydro is equipped to take on these challenges. In Mellbye’s view, the new company has a depth of expertise that gives it a serious competitive edge in a number of ways. For example, it has a leading position both as operator of subsea fields and in terms of its portfolio of subsea technology. Examples include the Tordis field in the Norwegian sector, where Statoil is due to start up the world’s first full-scale subsea separation system. Separately, both companies are actively involved in the development of subsea compression technology, and a pilot project is planned by Hydro on the Ormen Lange field in Norway.

The new company’s expertise applies not just to getting hydrocarbons out of the ground efficiently, but doing so in an environmentally friendly manner, an increasingly important requirement around the world. One example is Statoil’s pioneering work in the sequestration and storage of carbon dioxide in the subsurface.

Complementary contributions

While there is clearly some overlap in expertise between the two companies, there is also much that is distinctive in what they bring to the merger.

“The complementarity in terms of skills is evident in my view,” says Mellbye. “For example, Hydro has acquired a significant experience on the heavy-oil side. Statoil is into LNG.”

Granted, the experience of the two companies is somewhat different. “I think that broadens our capabilities to compete,” Mellbye says. “Then, of course, size itself is a very positive attribute. At the end of the day, it’s your ability to allocate human resources to an issue which really transforms your theoretical capability into practical achievement.”

Unarguably, the company increases its strength through being a larger organization.

“And as a larger organization, it’s going to be stronger financially, which is necessary because we can see that a lot of the projects we will compete for will be both large and long-term, and the ability to take on such projects is important for our ability to compete.

All in all, I feel we’ve strengthened our competitive capabilities significantly by merging,” Mellbye says.

The new entity also has the advantage of providing a single point of reference for the Norwegian government, which previously had to be careful to treat the two companies evenhandedly.

“It is an indisputable fact that the new company is the Norwegian oil and gas company,” Mellbye says. “So in terms of aligning the Norwegian political influence, this is now going to be an easier task than in the past when the government always had to balance the consideration of the one against the other.”

Being one company should also prove beneficial when it comes to seeking acreage or participation in foreign projects. In the past, Statoil and Hydro have vied to become partners in the Shtokman project, for example, but now they can offer a single-stop shop encompassing the offshore technology promoted by Hydro and the LNG expertise offered by Statoil. Talks with Gazprom still continue as well.

StatoilHydro should also benefit from Norway’s positive reputation around the world, Mellbye says, not least as a good manager of its petroleum wealth. Countries in an early phase of developing petroleum resources see that Norway has successfully faced up to the same challenges that now confront them, he explains.

Being received in a friendly fashion, however, will not obviate the need for StatoilHydro to be competitive, Mellbye points out. “I don’t think they give you contracts because they like you. The tendency is to award contracts based on merit. The parameters for winning and losing are hard economic and technical facts. The fact of where we are coming from takes away a lot of skepticism and at least gives us the privilege of being met by people with an open mind. But still you have to prove that you’re worthwhile.”

Both Hydro and Statoil have acquired significant operating experience on the Norwegian continental shelf. In many of their foreign assets, they are non-operating partners. Mellbye believes the new company may need to focus more on winning operatorships. “The way I’ve thought about it as long as I’ve been at Statoil is that the operatorship part isn’t really critical. The critical part is gaining access to good projects and to the right acreage. But now at this stage I think we should start thinking more seriously again about operatorships.”

Mellbye mentions two recent transactions as indicative of the company’s operating ambitions: Statoil’s $2 billion acquisition of North American Oil Sands Corp. in Canada, where plans call for eventual production of 200,000 b/d, and Hydro’s agreement to acquire Chevron’s interest and operatorship in the heavy-oil Bressay and Mariner fields in the UK.

The UK fields offer another opportunity to apply experience in developing the Grane heavy-oil field in the Norwegian sector. Hydro is already at work with partner Anadarko Petroleum on the Peregrino heavy-oil field development offshore Brazil.

Another significant advantage for StatoilHydro’s international operations is the close relations it has forged with leading contractors on the Norwegian continental shelf, especially in the subsea arena. Statoil recently signed long-term frame agreements worth NOK 15-25 billion ($2.7-$4.5 billion) with Aker Kværner Subsea and FMC Technologies for the supply of subsea equipment and services, and with Vetco Gray Scandinavia for additional equipment. The agreements also can be directed to international development projects.

“We have relationships in Norway with a number of such companies, and of course, we will always use those relationships in other settings,” says Mellbye. “It’s a fact that a number of the countries where we are present are very keen to increase their local content. So we would be keen to see that the companies we are used to working with also establish local relationships in order to contribute to the local industry development.”

Organization

The operations of StatoilHydro’s International E&P department are organized along the two dimensions of geographical regions and functions.

Of the four regions, two will be headed by former Hydro employees:

• The South Atlantic basin, including Brazil, Venezuela, and West Africa, will be headed by Kjetil Solbrekke, whose former assignments include head of Hydro’s Brazilian operations and head of international business development
• Middle East, Former Soviet Union, and Asia, will be headed by Torgeir Kydland, at previous times head of Hydro’s activities in Iran and head of international business development.

The other two regions will be led by former Statoil employees:

• North America will be headed by Øyvind Reinertsen, previously head of Tampen area operations in the Norwegian North Sea
• North Africa and Europe will be headed by Ottar Rekdal, prior to the merger head of Statoil’s North African cluster.

The two functions will both be headed by former Statoil employees:

• Bill Maloney will head Global Exploration
• John Knight will head International Business Development.

International E&P will be headquartered in Oslo. Operations for the South Atlantic, Middle East, Asia, FSU, as well as the two functions, will be based in Oslo as well. The North Africa and Europe unit will be based in Stavanger, and the North America unit in Houston.