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Statoil chief says mergers likely as industry faces turbulence

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By Ed Crooks and Carola Hoyos

Published: November 4 2008 02:00 | Last updated: November 4 2008 02:00

The oil industry faces several years of turbulence that could trigger a new wave of consolidation, according to Helge Lund, chief executive of Norway’s national oil company StatoilHydro.

Statoil is “focusing very strongly on costs and financial discipline as we move into a more challenging environment,” Mr Lund told the Financial Times.

However, he added that the company was in a strong financial position, with net cash on the balance sheet, and would stick with its long-term strategy. He was speaking as Statoil reported a sharp rise in underlying operating profits for the third quarter, up 59 per cent at NKr52.1bn ($7.76bn), but a steep fall in headline net income, which was down 57 per cent at NKr6.3bn, mostly because of exchange rate effects.

Statoil’s shares rose 4 per cent yesterday to NKr136, but remain down almost 24 per cent over the past 12 months. Its revenues are largely dollar-denominated, but many of its costs, including dividends and the wages of its Norwegian staff, are paid in krone, so it needs to hedge its currency exposure, and the rise in the dollar against the krone over the period created a NKr13.8bn currency loss.

The underlying result was lifted by a 38 per cent rise in the selling price of oil and gas in Norwegian krone terms compared with the third quarter of 2007, although that was offset by a 3 per cent drop in production to 1.73m barrels of oil equivalent per day.

Since then, however, oil has fallen sharply. It was below $66 per barrel yesterday, down from a peak of more than $147 in July, and an average of $107.60 for Statoil’s sales in the third quarter.

Mr Lund said the drop in US oil demand, which was down more than 1m barrels a day, or 5 per cent, in the third quarter compared with 2007, and down 2m barrels a day in the most recent four-week period, showed how the crisis was affecting the real economy.

“It is likely to be several years before it passes,” he said. “So the skill for companies will be to manoeuvre through this period while maintaining a long-term view.”

Statoil will give details in January on what that means for its capital spending programme, estimated at NKr65bn for this year. Any project that had already been sanctioned would go ahead as planned, Mr Lund said. “Which plans are sanctioned going forward will depend on how the world economy develops.”

On Shtokman, the gas project in the Arctic waters off the north coast of Russia that has an estimated cost of $15bn-$20bn, he said Statoil and its partners Gazprom of Russia and Total of France, were still “working full speed ahead” towards making a final investment decision.

“We have sent about 85 people into the development company, and we are committed to making a real decision on the project next year,” he said. “We had a board meeting two weeks ago, and all the partners were pleased with the efforts that were being made.”

However, Statoil has already delayed one high-profile project. In August it put a planned investment back by two years in the high-cost oil sands of Canada to build an upgrader, used to convert the bitumen produced into a form of crude that can be transported and sold easily. Mr Lund said the decision was “a result of the fiscal and regulatory uncertainty paired with rising costs in the supplier industry”.

Other big oil companies, such as ExxonMobil and BP, have highlighted the potential for the fall in demand and prices to reverse the upward trend of costs in the industry.

Statoil’s underlying cost per barrel in the third quarter was NKr33.2, up 14 per cent over the year, and the company expects it to still be in the NKr33-NKr36 range in 2012.

Mr Lund was cautious about cost reductions, however, saying they “will wait a while, because a number of these costs are set by contracts that cannot be changed immediately,” although he agreed they would fall if activity slowed.

He said the “cost tsunami” that had hit the industry was one of the factors making weaker companies vulnerable as the volatility in oil and gas prices hit.

“There will be more uncertainty, and many small and medium-sized players will see more challenges,” he said. “I would not be surprised if M&A activity picks up, and I would not rule out there being a new round of consolidation in the industry.”

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