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THE WALL STREET JOURNAL: Statoil Bets on Finding Oil

THE WALL STREET JOURNAL: Statoil Bets on Finding Oil

30 April 05

Unlike Rivals, Norwegian Firm Spends More On Exploration

By CHIP CUMMINS

Staff Reporter of THE WALL STREET JOURNAL

After taking the helm last summer at Statoil ASA, Norway’s biggest oil producer, Helge Lund made an unusual move.

The chief executive increased planned outlays for finding new oil this year, even as many of his peers are holding back on exploration spending amid today’s high but uncertain oil prices. And yesterday, Statoil announced a planned $2 billion purchase of prospects in the Gulf of Mexico from EnCana Corp., based in Calgary, Alberta.

“There are more investors that feel that the oil and gas industry recently has explored too little, not too much,” Mr. Lund says.

The big bet, he hopes, will help Statoil, the world’s 11th-largest publicly traded oil company by market value, deliver what many of its peers have all but given up on: significant oil-production growth.

Bigger and better-known European players BP PLC and Royal Dutch/Shell Group each produce about four million barrels a day, dwarfing Statoil’s current output of just more than a million barrels. The two giants are longtime favorites of oil-patch investors looking for a little international spice in their portfolios, but they can’t touch Statoil’s growth projections.

In 4 p.m. composite trading yesterday on the New York Stock Exchange, Statoil’s American depositary receipts fell 2.1%, or 37 cents, to $17.03 each, giving the company a market value of about $37 billion. The government of Norway still owns a bit more than 70% of the Oslo- and Big Board-listed company, though it has been unloading its stake since an initial public offering in 2001.

Before the EnCana deal was unveiled yesterday, Statoil’s share price in New York had risen about 10% this year, compared with 4% for London-based BP. Shares in Shell’s two parent companies — Royal Dutch Petroleum Co., The Hague, and Shell Transport & Trading Co., London — have risen about 2% and 5%, respectively.

Statoil has a lineup of projects expected to boost petroleum production by an average 8% a year through 2007. The rate is remarkable, compared with flat or falling forecasts by several competitors.

The timing couldn’t be better since Statoil’s pipeline is delivering amid superhigh oil prices. The company expects new oil from the all-cash Gulf of Mexico transaction to start flowing by 2008.

By contrast, Shell won’t see significant new production for several years and says output could dip this year and next before picking up. Even BP, which has raised output with a Russian joint venture and is entering its own sweet spot of new projects, is forecasting only 5% growth for the next few years.

Forecasts are a lot different than delivery in the oil business, where price swings and political unrest can wreak havoc on production plans. But Robert Plummer at Wood Mackenzie said the Edinburgh, Scotland, oil consultancy is “very comfortable” with the projections, citing Statoil’s conservative method for booking reserves — the estimate of oil still in the ground that the company expects to pump someday.

Statoil plans to raise spending on exploration projects by almost two thirds this year, to as much as four billion Norwegian kroner, or $637 million, from 2.5 billion kroner last year.

Investors tend to look suspiciously at big spending in the cyclical oil business, cautious of suddenly falling oil prices. With much of the world’s easy-to-find oil already found or closed off to foreigners, it is increasingly difficult to find projects with healthy enough returns.

Mr. Lund said the growth won’t come at the expense of returns. Last year, the company’s return on average capital employed — a standard measure of profitability in the oil business — was a robust 20.8%, according to Lehman Brothers. That was the fourth highest among large oil companies. The performance edged out BP (20.5%) and Shell (19.2%), and it beat every other European oil company except Total SA (24.1%) of France.

International fields are expected to make up a chunk of the company’s new oil production in the next three years. But much of the exploration spending this year still is going to the North Sea, Statoil’s backyard since the company’s formation in 1972.

Though new discoveries may be harder to find in the picked-over region, finds can be hooked up inexpensively to an existing network of pipeline, processing plants and export facilities, Mr. Lund says. “I’m more optimistic than I get the feeling others have been” in the North Sea, he said.

Write to Chip Cummins at [email protected]

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