Statoil to Deepen Cost Cuts to Make Extra $5 Billion in Cash

Employees Move Aboard a Statoil Offshore Gas Platform
Employees move aboard an offshore gas platform operated by Statoil ASA 140kms from Bergen. Statoil wants to open discussions with Norwegian authorities both on safety regulations and on offshore-worker rotation systems in order to close the gap between Norway and the U.K. on daily rig rates, which stands at about $100,000, it said in the documents. Photographer: Kristian Helgesen/Bloomberg

Statoil ASA, Norway’s biggest oil company, is preparing to deepen cuts to investment, operating expenses and staff in a bid to generate an extra $5 billion of cash a year.

The state-controlled explorer wants to meet that target for additional pretax cash flow by 2020 by reducing capital expenditure by as much as 25 percent compared with 2013, trimming operating costs by 15 percent and eliminating 20 percent of its technical staff, according to internal documents seen by Bloomberg News.

The goals are more ambitious than those Statoil made public in February, showing the pressure rising costs are putting on profit margins at the world’s largest oil producers as crude prices stagnate. Stavanger-based Statoil has particular challenges in Norway, where drilling is more expensive than anywhere in the world and labor costs are almost double those in the U.S.

“Statoil faces escalating costs and declining returns, and needs to significantly improve cost and resource efficiency,” the company said in the documents, which outline its ambitions. To tackle these challenges, the company is creating what it called a Technical Efficiency Program with “an ambitious but achievable ambition level: when fully implemented, improve Statoil’s pretax cash flow by $5 billion.”

Pretax cash flow last year was $36.5 billion, according to an earnings presentation.

Shares Rise

“We do not wish to comment on internal working documents where early scope and ambitions for our ongoing efficiency program are expressed,” spokesman Jannik Lindbaek said by e-mail today. “We presented our strategy, priorities and deliveries at our capital markets update in February, and these remain firm.”

A contract to design the efficiency program and support Statoil in setting it in motion has been awarded to consulting firm McKinsey & Co Inc. following a tender earlier this year, Lindbaek said, declining to comment on the deal’s value or duration.

Statoil shares rose 1.9 percent, the most since April 29, to close at 185 kroner in Oslo.

Strategic Shift

To achieve the reduction in capital investments, the program aims for a 25 percent cut in well-related costs by 2020, according to the documents. That compares with a reduction of 15 percent by 2016 proposed at the company’s capital markets update in London in February.

Similarly, Statoil, which produces about two-thirds of its oil and gas in Norway, wants to reduce the cost of modifying existing platforms and other assets by 30 percent by 2020, compared with 20 percent by 2016. The company also plans to lower the cost of new facilities by 25 percent in the same period.

In a strategy update in February, Statoil said capital expenditure, which reached $19 billion in 2013, would be 8 percent less than previously planned in the period from 2014 through 2016, or about $20 billion a year. Operating expenses reached 75 billion kroner ($12.5 billion) last year.

Norway’s government, which owns 67 percent of Statoil, reacted to the plans by warning the company and its competitors they should avoid project delays.

Investors welcomed those goals, with Statoil gaining 25 percent in Oslo trading since presenting its strategic shift to focus on higher returns over production growth. The gain is about double that of Royal Dutch Shell Plc in London.

Aside from cuts in investments, costs and staff, Statoil said in the documents it could increase revenue by $1.8 billion through production efficiency measures.

World’s Highest

Reducing drilling costs is ranked first among six projects within the program. Statoil said expenses per meter drilled have risen 240 percent in 10 years as the distance drilled per day fell 44 percent. The cost of production wells is 25 percent higher than for peers on mobile rigs and 20 percent higher on fixed rigs, the documents said.

Drilling costs in Norway, western Europe’s biggest oil and gas producer, are the highest in the world and at least 40 percent higher than in the neighboring U.K., a government-commissioned report said in 2012.

Relaxing rig requirements and lowering labor costs are essential to maintaining production after a 20 percent decline over the past 10 years, according to the government’s report, led by Eivind Reiten, a former chief executive officer of Norsk Hydro ASA.

Offshore Rotation

Statoil wants to open discussions with Norwegian authorities both on safety regulations and on offshore-worker rotation systems in order to close the gap between Norway and the U.K. on daily rig rates, which stand at about $100,000, it said in the documents.

Other efficiency measures outlined in the documents range from the standardization of offshore platforms and subsea installations to a 10 percent reduction in research and development spending.

By being more selective on investments and cutting costs, the company has said it expects to cover dividends with organic free cash flow by 2016 after partially funding raising payouts with asset sales of more than $18 billion over the past four years.

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