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THE WALL STREET JOURNAL: Algeria Oil Tie-Up Thrives

Is Sonatrach Deal
With StatoilHydro
A Lesson to West?
By GUY CHAZAN
January 28, 2008; Page A8

ALGIERS, Algeria — State-owned energy giants are increasingly joining forces to expand internationally, a worrying sign for Western oil companies already besieged by the global stampede to find new reserves.

In recent years, national oil companies have signed a series of deals with each other on technical cooperation and sharing access to resources and markets. Consulting firm PFC Energy says there were two such contracts in 2000; in 2006 there were 16.

A prime example is the relationship between Sonatrach of Algeria, the biggest company in Africa by revenue, and Norway’s StatoilHydro ASA. The Norwegians are offering Sonatrach technology transfers, asset swaps and access to the lucrative U.S. energy market. In exchange, StatoilHydro is angling for rights to drill for oil and gas in huge untapped swathes of the Algerian Sahara.

Chakib Khelil, Algeria’s minister for energy and mines, says StatoilHydro is an ideal partner because, like Sonatrach, it is government owned. “It’s like kids on the block,” he said in an interview. “You develop a camaraderie with one particular guy because you find you’re very close to him in terms of culture.”

Algerian officials now say only those Western oil companies that take the StatoilHydro approach — helping Sonatrach achieve its international ambitions — can expect preferential treatment in Algeria. With oil hovering at $90 a barrel, and Algeria sitting on the world’s seventh-largest natural-gas reserves, no one is in much of a position to argue.

National oil companies dominate the global energy economy, controlling more than three-quarters of the world’s oil and natural-gas resources. Of the top 20 oil producers in the world, 14 are state-backed national giants. High oil prices have swelled their coffers, giving them financial muscle and confidence to rewrite production deals with the majors.

But they are also competing with the majors for global assets. What is more, their status as national champions gives them a built-in advantage over Big Oil. They can leverage government-to-government relationships and negotiate favorable deals.

International oil companies like Exxon Mobil Corp. and Royal Dutch Shell PLC say they still have lots of things many state-backed companies lack. In a recent speech, BP PLC Chief Executive Tony Hayward listed five competitive advantages: access to risk capital; technical expertise in areas like geochemistry; diverse asset portfolios; an ability to build relationships with customers world-wide through their refining, marketing and retail businesses; and strong brands that transcend national boundaries.

“We have learned to make our living on the geographical and technical frontiers of the industry,” Mr. Hayward said. But those frontiers are getting more crowded. Some of the national companies, especially the partially privatized ones, are almost as technologically advanced as the majors. Petróleo Brasileiro SA is a world leader in ultradeepwater exploration. StatoilHydro, in which the Norwegian state has a 62.5% stake, is considered a leader in Arctic offshore operations and subsea production technology.

Some national oil companies “bring capital and technology, others bring political access,” says Robin West, head of PFC Energy. “Together it can be a very strong combination.”

On the other hand, some cases of cooperation between state-backed giants are politically driven. Venezuelan President Hugo Chávez says he will shun Western majors in favor of partnerships with state-owned companies from politically friendly countries to develop new resources like the heavy-oil deposits of Venezuela’s Orinoco Belt.

Some petrostates simply prefer working with government-owned companies. The deal last October to bring StatoilHydro into OAO Gazprom’s massive Shtokman gas-field project in the Barents Sea was clinched during a friendly phone call between President Vladimir Putin of Russia and the Norwegian prime minister, Jens Stoltenberg, and was first announced on the Kremlin’s Web site.

The Sonatrach-StatoilHydro alliance grew from a confluence of interests. Both were created by the state as custodians of their respective countries’ natural-resource wealth.

Now, both companies face the same challenge: how to deal with the prospect of declining reserves at home. Both have responded by seeking to diversify away from their domestic base — Statoil into countries like Angola, Canada and Azerbaijan; Sonatrach into Peru, Mali, Mauritania and Libya.

Statoil’s merger last year with the oil and gas assets of Norsk Hydro ASA, another big Norwegian natural-resource player, was driven by the need to bulk up to better compete globally for reserves. Meanwhile, Sonatrach is regularly competing with — and occasionally beating — the majors in bidding rounds for exploration licenses, most recently in Libya.

Sonatrach’s “objective is to get at least 30% of its production from its international operations by 2015,” Mr. Khelil says.

Statoil first came to Algeria in 2003 when it partnered with BP and Sonatrach to develop two huge natural-gas fields in the Sahara desert. A year later it outbid the majors to win a huge exploration bloc, Hassi Mouina, in the center of the country, where it is drilling for gas together with Sonatrach.

Meanwhile, Statoil has deepened its relationship with the host country. It bought a 10% stake in IAP, Algeria’s prestigious Petroleum Institute, which trains engineers. It set up a program to train Algerians in Western health and safety standards: 6,000 Sonatrach employees have been through it.

StatoilHydro has offered Sonatrach equity in one of its North Sea gas fields, as well as capacity at a liquefied-natural-gas import terminal in Cove Point, Md. Those moves would allow Sonatrach to break into the lucrative northern European and U.S. natural-gas markets, where it has little presence. Last year, Sonatrach and StatoilHydro launched a successful joint bid to develop two offshore gas deposits in Egypt.

StatoilHydro is hoping these steps will give it an advantage when Algeria offers up licenses for some new exploration blocs later this year, the first such bidding round in three years. Some wonder whether that optimism is justified.

“StatoilHydro’s relationship with Sonatrach certainly seems to have blossomed over the last couple of years,” says Craig McMahon, a specialist in North Africa at oil consultancy Wood Mackenzie. “But when it comes to negotiations, the vast majority of countries, including Algeria, will do whatever deal is in their best interests.”

Write to Guy Chazan at [email protected]

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