Statoil's Hydro Buy-Up Could Be Bad for NCS

LONDON, Dec 26, 2006 (Dow Jones Newswires)

The proposed merger of Statoil (STO) and Norsk Hydro's (NHY) oil and gas arm has been widely hailed as a success for the two companies, but could spell trouble for the Norwegian oil and gas industry's future prosperity.

A combined company would be better able to meet growth targets, through reserves replacement and increased production, on an international rather than domestic level. However, the price of international growth could be faster NCS decline, as the new company's monopolistic position could reduce the existing benefits of competition between Statoil and Hydro, for partners, equipment and personnel.

"Overall, the deal's positive for the companies and their international ambitions," said Sveinung Sletten, vice president for external affairs at Norway's Petoro AS, which manages the government's Norwegian oil and gas interests. "But if you look specifically at the management of our portfolio and the overall management of the NCS, I'm not so convinced," Sletten said.

"It has potential, but you have to look at the possibility of losing out on the benefits of competition" between the two companies, he said. "One can be a good challenger against the other, and as partners we could use the companies to check out proposals," he said.

Statoil, Norway's biggest energy company, said last Monday it will acquire Norsk Hydro's oil and natural gas assets in an agreed share-swap transaction valued around $30 billion.

Combining the energy businesses of Statoil and Hydro, in each of which the Norwegian government is the biggest shareholder, would create Europe's fifth-largest oil company by market value.

The companies are currently key players on the NCS with the heft to exploit both new and more mature assets via higher investment levels and a commitment to opening as many new areas of the region as possible.

The companies have moved swiftly to realize some of the cost cuts available under the merger, making significant alterations to a series of substantial rig deals and sending an early warning shot across the bows of the Norwegian continental shelf, or NCS.

On Dec. 15, Hydro dropped a provisional four-year contract with Seadrill for a deep-sea drill ship at Ormen Lange with Seadrill, worth around $806 million, while Dec. 21, Statoil canceled a five-year, $895 million deal with Odfjell for a rig for the NCS. Both companies cited inflated prices for the cancellations.

Equity analyst Mark Bloomfield at Citigroup said Friday that although in the early stages, "it appears that the proposed formation of a Statoil and Norsk Hydro "Newco" will allow optimization of rig planning."

He added that recent changes suggest cost-cutting benefits for the new company but with "commensurate loss of opportunities for the rig contractors."

"Now there are a lot of interesting issues to think about," said Kjell Varlo Larsen, spokesman for Norway's gas pipeline system operator Gassco. "For example, should the entity continue to sell Petoro's gas (the state's), there are always concerns in Norway about great size and grandeur of companies," said Larsen.

Statoil alone is already the operator at fields producing more than 60% of NCS oil and gas production, while Hydro is operator at fields producing around 30% of the NCS' oil output, spokesmen for the two companies said.

There is an expectation, particularly among hopeful small companies, that the combined company will have to relinquish some of its acreage because of its monopolistic position.

"What impact will that have on the supply industry?" asked a person at an operating company on the NCS. "Until now, at least there have been two major Norwegian companies for bids: Now there will be one. The new company will have a different strategy, although the European Union might make some comments about that," the person said.

The merger will need approval from the E.U. competition authority, although it isn't expected to rule against it given the changing focus to security of supply.

A new strategy could see the restructuring of Norway's resource base as the nascent oil giant streamlines its portfolio and eyes up assets overseas in an attempt to score big finds, leaving behind smaller NCS developments at which their input is crucial.

While the NCS offers an increasing wealth of opportunities to small and new entrants, many of these companies operate in only one sector, such as exploration or production, or rely on the existing infrastructure and expertise of Norway's incumbents. Redirecting focus from late-life, smaller oil and gas projects could shorten the lifetime of the NCS, if Statoil and Norsk Hydro's support is withdrawn.

With many of Statoil and Hydro's field partners having limited resources in comparison, the process of collaboration and competition between the two "was a very effective way of working, so that is something we think we will all miss," said Petoro's Sletten.

Although the two companies have remained tightlipped about cost cuts, it's likely some jobs will be axed, the person at an NCS operating company said.

"You take synergies out of any merger, in technology, sharing of systems and people. Clearly there is big demand for the technical side and skills, but I suspect the companies will take the opportunity to offer early retirements to people who are close to that age," the person said.

Statoil and Norsk Hydro regularly top Norway's "best employer" polls, but enlarged focus on international operations will also likely draw skill away from the Norwegian pool to elsewhere, reducing the human capital available to other NCS operators.

Gassco's Larsen flagged up the impact on the management of the gas pipeline system. "There will be a debate between the rest of the companies" in the Gassled Norway pipeline ownership venture," he said. The merger will have an impact on how things are done, or organized in Gassled," Larsen added.

While Norway's oil and gas industry may feel the merger's pinch around its margins, some have also questioned the timing and the success it will have internationally - not least because it trails other European mergers by a number of years.

Statoil and Hydro's distinct cultures may clash, Sletten said. "It's not a black and white picture for us. In order for the deal to be very positive we need to see the two cultures come together and develop the best aspects of each," he added.

"Previous mergers have shown that it's not always very simple to get the best of both companies, often one culture will dominate. The jury is still out here, it will be out for some time, until we see the real effect," he concluded.

Copyright (c) 2006 Dow Jones & Company, Inc.

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