Commentary, 1/2 2007

Published Feb 8, 2007
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Interesting Times

They say hindsight is 20-20, and if we look back about a half year ago, we see near-record oil prices. And at that time, it looked like the sky really was the limit. But after peaks in the high $70’s, we saw a price decline that so far this winter sees prices hovering in the low to mid $50s. Last fall, many analysts felt that the $50s would be the “natural” price, but few saw it happening so quickly.

As prices rose, especially during 2006, we saw a build-up of activity in exploration. And the result has been more confidence in the industry’s ability to maintain production, shoring up the prognosis for the supply side. This part of the equation seems natural, because as prices rose, so did impetus for exploration as well as taking another look at marginal fields and older fields. Recent technological advances have also done much to improve oil recovery.

But it’s been the demand side that has held the most surprises. So far, a mild winter is one large factor, easing the pressure on supplies. Although demand world-wide is continuing to grow, some of the areas – such as China – have not continued to grow as quickly as expected. What may be the most interesting aspect of recent prices is that headlines that once screamed about record prices now do the same about “weakening” prices and corporate short-falls. Stay tuned for more insightful hindsight.

But the industry is certainly not sitting still. Oil prices remain at near double of just a few short years ago, and part of the success on the supply side has been in the partnerships and mergers making it possible to acquire access to technology and acreage that improve production rates.

One recent local development caught many by surprise. But anyone who keeps an eye on the North Sea is now aware of last December’s announcement of the impending merger of Hydro’s oil and gas activities into Statoil. Speculation has been rife about the Norwegian government’s intentions, but the announced purpose – to build a powerhouse that can compete strongly anywhere in the world – is a strong argument. Gazprom’s snub of the outside world concerning Shtokman served as a lesson about fierce competition. Internationally, Norway’s “new” E&P company will hold a competitive an advantage.

A big winner in the merger is the Norwegian public. The merger goes a long way toward increasing the state’s share of oil and gas activities. Once Hydro’s oil and gas activities are fully assimilated by Statoil, the state will hold the lion’s share of the new company. Think new Statoil plus Petoro plus the special petroleum tax, and the result is that very little of the petroleum wealth generated in Norwegian waters will find its way abroad (except when the Pension Fund makes international investments).

But the industry that supplies both Statoil and Hydro has been somewhat reserved in its response. The new, more muscular Statoil may be more successful abroad, but what will a single entity at home mean for a supply industry that needs to prove new technology? Will the opportunities that were afforded by two independent companies with two independent philosophies remain?

Probably the most amusing speculation surrounding the merger is what the new company will be called. What’s in a name? – one might ask (Statdro/Hydroil?). The cost has been estimated (by those who know about such things) to be in the billions of kroner to re-name and re-brand the new company.

Statoil’s downstream activities, the service stations that dot the Scandinavian and Northern European landscape, are instantly familiar to everyone. So why rename the entire company? Imagine a motorist pulling into a “station formerly know as Statoil” in Poland asking himself, “Who bought Statoil?”

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