Commentary, 5/6 2007

Published Jun 5, 2007
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Commentary, 5/6 2007-Spotlight

The 500-Pound Gorilla
Remember the old joke – the really old joke? “Where does the 500-pound gorilla sit for dinner?” (Answer: anywhere he pleases).

Unless you’re about 6 years old, you probably grimace when you hear it, but this is the sort of old, hackneyed joke that often pops up as a (somewhat lame) way to prove a point. More are beginning to worry that once the oil and gas activities of StatoilHydro have been fully merged, the result may be to put the entire Norwegian oil and gas industry at a disadvantage.

We’ve heard much about how StatoilHydro will stand up to the competition on a world-wide basis. And it takes deep pockets and clout to stand one’s ground in the world-wide market dominated by the super majors. Both Statoil and Hydro have made significant E&P deals outside the Norwegian Continental Shelf (NCS), and pooling theses efforts in the international arena is a strong argument for doing even better.

It’s at home where we see increasing doubt. We’ve seen reports that when the Norwegian Competition Authority (NCA) offered its opinion of the Hydro-Statoil merger, it was “gagged” by those in power who support the merger.

Is the NCA concerned that StatoilHydro will squeeze the competition out of the NCS? With a combined total of approximately 80 percent of existing NCS activities, this could happen. Did the NCA comment on how attractive a StatoilHydro-dominated NCS would be to non-Norwegian oil and gas companies? Does the NCA feel that a single state-run E&P concern could mean that up-and-coming Norway-based suppliers could be left out in the cold?

One day, we may know more about the NCA’s concerns, but for now, we – and others in the government and media – can only speculate.

The combination of Statoil and Hydro activities on the NCS especially brings focus to the issue of support for a home-grown supply industry. All together, the amount of activity of the merged company will most likely only grow. But once all the decision-making is centralised, what will happen to the total number of Norwegian suppliers?

StatoilHydro will have the power to make or brake any domestic company that wants to introduce its innovation to the oil and gas industry. Government-sponsored programmes such as Demo-2000 and Petromax help new ideas to take shape, but how will the government ensure that StatoilHydro will take the next step towards commercialisation? Without proven results from the NCS, many ideas could remain on the drawing board.

As we go to press, Statoil has reported its first-quarter profits, which have declined 27 percent from the same period last year earlier due mainly to lower oil and gas prices. This is not to say that the results are not strong, but it serves as a reminder that the industry’s success is a direct result of market prices and the cost of doing business.

The question is will the NCS be profitable enough for small to mid-sized companies once the merger is complete. The giant StatoilHydro will be able to absorb price fluctuations with ease, but this may not be the case for mid-sized or smaller companies that rely on tail-end or marginal fields.

What will be the affect on the NCS if StatoilHydro’s price-cost ratio continues to narrow?

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