Statoil, Norsk Hydro Clash Over Troll Field Development

Norway's Statoil ASA (STO) and Norsk Hydro ASA (NHY) have clashed over the development of one of the world's biggest petroleum fields, possibly meaning a year's delay, officials at the partner companies said.

The two operators fundamentally disagree on the schedule, production volumes and development concept for the Troll field in the Norwegian North Sea, estimated to have recoverable resources of 1.8 trillion cubic meters of natural gas and 2 billion barrels of oil.

Under the current timetable an application is to be submitted to the oil ministry in late 2006, but people close to the matter told Dow Jones Newswires there's already a chance that the project could be delayed a year. At stake is enough oil and gas to meet several countries' energy needs for a decade.

"We might be moving too quickly, and we'd like to do more work," said Norsk Hydro's Vice President Rune Adolfsen. "It's crucial to the oil recovery" from the field, he added.

Statoil has said a plan for the field was agreed at the end of June, but according to Norsk Hydro that plan is too aggressive and could see millions of barrels of oil lost.

The Troll field has been producing gas since 1995 and current output is about 125 million cubic meters a day. Statoil wants to increase that to 40 MCM/d, the sale of which would pay for onshore processing and a new pipeline into the U.K. or continental markets.

Statoil Vice President Geir Amland, the company's head of the Troll project, described the new processing plant and pipeline as a "golden opportunity."

The onshore development would allow capacity to be expanded to accept gas from new discoveries, particularly from the Norwegian Sea's Halten-Norland area, and the new pipelines "could be very strategic infrastructure," Amland said in an interview with Dow Jones Newswires.

But Norsk Hydro has said the potential problem is that there are two sections of the Troll field - a gas reservoir in the east, and a gas and oil reservoir in the west. Extracting too much gas too fast from either of the reservoirs may affect oil recovery from the west side by releasing the pressure vital to crude production.

A new horizontal well drilled by Norsk Hydro in July between the east and west reservoirs raised questions about the extent to which the two compartments "communicate," said Adolfsen. Before drilling the well, Statoil and Hydro believed there was limited communication between the two compartments, so it wasn't thought that extraction from the east side would impact oil output in the west of the field.

"But since the results (of the new well) haven't been determined, we're not in such a hurry," Adolfsen said. "We need to mature this project more before we go to the next level."

Pressure communication "might jeopardize oil recovery by starting an irreversible process...so it's prudent to not be so aggressive," Adolfsen said.

Statoil envisages new processing facilities at Kollsnes, a new pipe from Troll East to Kollsnes, and a new pipe to the U.K. or the continent, all online by 2010.

Two new compressors - which ramp up gas output - would come online in 2013 and 2016. Statoil wants to increase Troll East production by between 25 MCM/d and 40 MCM/d, giving Troll total gas output of between 145 MCM/d and 165 MCM/d. As output starts to wane from Troll East, the company would increase gas output from Troll West in 2016.

Amland said intensive work to improve oil recovery, "will hopefully stretch Troll's oil profile well into the 2020s." Gas life is expected to end around 2060.

Norsk Hydro, however, said its preferred scenario would add compressors to the existing platforms two years later, ramping up gas output slower and only by a total of 15 MCM/d-25 MCM/d. Troll West gas wouldn't come online until 2018, and there would be no new pipeline to the U.K or the continent. Existing pipelines would be used. Oil production could possibly continue until 2030, and gas output until 2060.

"We're focusing on resource optimization (in the) long term," said Adolfsen. He said Statoil's proposal could potentially reduce oil recovery by around seven million barrels.

Supporting Adolfsen's argument, another person close to the project said while Statoil's plan may represent the best Net Present Value - a key measure analysts use to assess a project's economic viability - too aggressive an increase in gas output from Troll may destroy the market for other gas field developments.

He also said Statoil's proposed gas capacity expansion doesn't fit Norway's field and capacity growth plan, and might create a surge in output that could flood the market and undercut gas market prices.

Amland said his company - with a 20.8% interest in the field to Hydro's 9.78% stake - is focused on maximizing the value of both oil and gas, or what he calls, "the best resource-management of both." He argued that oil recovery should only be minimally affected by the 40 MCM/d option and represents the best value for money.

Norway's government also has a keen interest in the mammoth project and the Norwegian Petroleum Directorate - which advises the Oil and Energy Ministry on development plan approvals - appears to be taking a more cautious approach.

Last week, it published two articles about the Troll field, both of which warned about the uncertainties of cross-compartment communication. "Starting too early is likely to have major consequences for oil recovery," one of the NPD's articles said.

Lief Hinderaker, the NPD's coordinator for the Troll project, told Dow Jones Newswires, "We think its very important (that the partner companies) have evaluated every well before the decision is made...they need to take the most recent information into account."

In order to get the NPD's approval, however, Statoil must convince the department that its plan won't destroy value, as Hydro has suggested.

Other partners in the Troll field are state-owned Petoro with 56%, Royal Dutch Shell PLC (RDSB.LN) with 8.1%, ConocoPhillips (COP) with 1.62% and Total SA (TOT) 3.69%.

Copyright (c) 2005 Dow Jones & Company, Inc.