Statoil Merges Gas Trading With Oil to Suit Freer EU Market

Statoil ASA (STL), Europe’s second-largest natural-gas supplier, will merge its gas- and oil-trading units as differences in buying and selling the two commodities fade and competition increases.

The Norwegian company plans to combine its gas-trading operations with a liquids division that buys and sells crude, condensate, refined products and gas liquids from May 1, Eldar Saetre, Statoil’s executive vice president for marketing, processing and renewable energy, said in an interview.

“Gas markets have gradually changed in Europe, from being based on long-term contracts and oil-indexed price formulas to being a more liquid and fully traded market, such as crude oil,” Saetre said. “There’s tougher competition and even more players in our markets. That means I see the need to take out cost synergies and improve efficiency.”

Producers such as Statoil are adapting to the demands of European utilities such as RWE AG (RWE) that want to undermine the tradition of linking gas-supply deals to oil prices, a 40-year-old system set up before European gas markets for immediate delivery developed. The practice has led to losses for utilities because gas has become cheaper and the oil price has climbed.

Less than half of wholesale gas in Europe is sold under oil-linked contracts compared with almost all before the 2008 financial crisis and a push by European Union regulators to liberalize continental markets, according to Thierry Bros, an analyst at Societe Generale SA. (GLE)

Trade Increase

Natural gas volumes at the Netherlands’ Title Transfer Facility, mainland Europe’s biggest trading hub, rose 10 percent in 2013, according to Trayport Ltd.’s Euro Commodities Market Dynamics Analysis report, which compiles data on broker bilateral, broker-cleared and exchange-executed trades. Aggregate volumes of Brent oil on ICE Futures Europe advanced 7.3 percent in the same period, according to ICE data on Bloomberg.

“Euro Gas had the second-highest volume growth of the Euro Commodity markets,” Trayport said Jan. 15 in a blog on its website. “This volume growth supported the increasing importance of this market sector to the European Energy markets.”

Global gas trade will jump 30 percent in the seven years through 2018, led by soaring Australian exports and boosted by North American liquefied natural gas shipments at the end of the period, according to the International Energy Agency. That will raise pressure on exporters to revise the link between long-term supply deals and oil as the gap between the two fuels persists.

Third Parties

Statoil produces about a third of Norway’s oil and gas, which it trades in addition to volumes from third parties such as the Norwegian state, making it the world’s third-largest net seller of crude, according to the company. It has trading offices in Stavanger, London, Singapore, Stamford and Calgary, with 360 employees in the oil market and 370 for gas.

The merger of the two units won’t have direct consequences for staffing beyond current cost-saving measures, Saetre said.

Statoil advanced 1.4 percent to 160.5 kroner in Oslo trading, the highest closing price since March 19, 2012.

The company marketed 95.8 billion cubic meters of gas in 2012, half of that its own output. Eighty percent of the total went to Europe, representing 70 percent of all Norwegian gas exports. The same year, the Stavanger-based company sold 714 million barrels of crude and 171 million barrels of natural-gas liquids, less than 40 percent of which was its own production.

Marketed Volumes

The 67 percent state-owned company, the biggest gas supplier to the U.K. and Europe’s largest after Russia’s OAO Gazprom, has said more than 75 percent of its gas contracts will be linked to spot prices by 2015, up from 55 percent at the end of 2012. Statoil no longer has oil indexation in its German contracts and has largely eliminated it from deals in northwest Europe, though the liberalization of southern and eastern European markets hasn’t come as far, Saetre said Feb. 12.

GDF Suez SA (GSZ), owner of Europe’s biggest gas network and one of Statoil’s biggest clients, said last week long-term European contracts must become more flexible if they are to survive as a feature of supply security as cheap coal imports make gas-fired plants less competitive. “The market, and gas in general, would be well-served with a development toward hub-pricing,” Saetre said. “We have played an active role in this.”

Statoil is being “innovative,” increasingly offering contracts adapted to individual customers, according to the executive. These include pricing linked to the spread between electricity and gas prices for power producers, he said.

Adapting Contracts

Still, the company is facing arbitration proceedings with Italy’s Eni SpA (ENI), which claims it has been overbilled for years for its gas. Saetre wouldn’t confirm reports Eni is seeking $10 billion in compensation, saying that Statoil seeks to negotiate a deal before the case reaches an arbitration tribunal.

Germany’s RWE last year got money back from Gazprom after pushing for a better deal as gas spot prices slumped lower than the long-term contract, the first time the Moscow-based producer has been forced to adjust its deals by a court ruling.

Statoil, Royal Dutch Shell Plc (RDSA) and BP Plc (BP/) are also under scrutiny by U.S. and EU authorities after suspected manipulation of oil benchmarks published by Platts. Statoil doesn’t plan to leave the pricing system and declined to comment on the probes.

“We don’t know why this happened and why we were included in this investigation,” Saetre said. “We have yet to get any good explanation.”

Oil Benchmarks

In addition to the merged marketing-and-trading unit for oil and gas, Statoil’s marketing, processing and renewable-energy unit will from May 1 include individual departments for renewables, operations and asset management, splitting ownership of installations such as refineries from day-to-day work.

“As Statoil’s MPR business has changed, this actually seems pretty reasonable,” Swedbank First Securities analyst Teodor Sveen Nilsen said by e-mail, referring to all the organizational changes. “When it comes to asset sales, most people expect more will come.”

Statoil has sold assets for more than $18 billion since 2009 to afford higher dividends as rising costs cut into profit. The company signaled the trend would continue even after scaling back investment plans for the next three years by 8 percent.

“To have an even more active management of our portfolio is a part of” MPR restructuring, Saetre said. “To consider at all times whether we have the right assets is a part of our strategy.”

To contact the reporters on this story: Mikael Holter in Oslo at mholter2@bloomberg.net; Anna Shiryaevskaya in London at ashiryaevska@bloomberg.net

To contact the editors responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net; Will Kennedy at wkennedy3@bloomberg.net

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