Norway Plans to Tame Statoil Domination as Output Shrinks

Norway, which has watched its crude output fall every year since 2000, wants to attract large producers to compete with Statoil ASA as the state-controlled company cancels and delays key projects.

Western Europe’s largest oil and gas producer now needs a broader group of big companies with the technological know-how and financial strength to help develop resources, Petroleum and Energy Minister Tord Lien said.

“We need more large players,” Lien, who took power in October, said yesterday in an interview in Oslo.

Statoil last year delayed an investment decision on its Johan Castberg oil project in the Arctic Barents Sea, citing rising costs and a tax increase by the previous government. It then pushed back by a year the start of its Johan Sverdrup field, delaying what may be the biggest Norwegian oil discovery since 1974. The company also scrapped plans for a pipeline to the Kristin gas field.

Stavanger-based Statoil, which is 67 percent owned by the state, controls more than 70 percent of Norway’s production after merging with Norsk Hydro ASA’s oil unit in 2007.

“Statoil is very important for the Norwegian shelf, has been and will be,” Lien said. “But we remember when we had Hydro and Statoil challenging each other. That created some positive synergies.”

Reducing Investments

The company will probably reduce investment and output goals when it reports earnings tomorrow as it struggles with rising costs, analysts said. Statoil, which a year ago set a target to invest an average $21 billion annually from 2013 through 2016, may spend 9 percent less over the period, according to the mean estimate of analysts surveyed by Bloomberg.

Soaring costs have eroded profits at oil companies, which are struggling to cover dividends following record spending. Statoil has pledged to increase shareholder payouts and has sold assets from Azerbaijan to the North Sea to raise cash, while executives have said the company will choose investment projects more carefully and isn’t “wedded” to output goals.

Tax Increases

Lien declined to provide details on what measures the government is planning to attract more producers to Scandinavia’s richest economy.

While the Conservative-led coalition upheld a tax increase on oil companies introduced last year by a Labor-led government, it has commissioned a report to assess the consequences of the measure. It’s also working on steps to cut costs, including tax incentives to boost recovery rates and improve resource management. These aren’t due before the end of the year.

Norway’s Labor-led government shocked the oil industry last year by reducing the deductible part of companies’ petroleum income, while keeping a top tax rate of 78 percent. Explorers are allowed to write off expenses for drilling.

The new government has said it will try to increase competition by awarding licenses. Last month, it handed out 65 licenses to 48 companies, setting a double record for mature areas.

Statoil Used

“We’re used to facing strong competition everywhere,” Oerjan Heradstveit, a Statoil spokesman, said by phone. “The interest for the Norwegian shelf has increased, not least when it comes to exploration. It’s an attractive shelf that’s blossoming again and diversity and competition are increasing.”

Still, the minority government’s two parties, the Conservatives and the Progress Party, backtracked on election promises to open the protected waters off the Lofoten islands to oil exploration.

Norway’s relations with international investors have been strained by other events. The government is battling lawsuits from investors in its natural gas pipeline network, called Gassled, after it in December agreed to back the previous government’s cuts of as much as 90 percent on gas transport tariffs. It had previously criticized the reductions.

While the cuts are designed to make discoveries more profitable for explorers and producers, the pipeline owners, which include Canadian pension funds and units of Allianz SE and Abu Dhabi’s sovereign wealth fund, say they will hurt Norway’s reputation as a stable and predictable place to invest.

Norway’s oil production fell to a 25-year low 1.46 million barrels a day in 2013, less than half of the peak in 2000. The country estimates it has about 50 billion barrels of oil equivalent in resources still left in the ground.

Wealth Fund

Oil and gas activity makes up about 20 percent of Norway’s $500 billion economy. The nation has built an $810 billion sovereign wealth fund over the past 18 years by setting aside a majority of that revenue.

As costs surge and producers grow more cautious with their capital allocation, oil investments in Norway are set to decline. After reaching a peak of 180 billion kroner next year, not including exploration costs, investments will drop, according to the Norwegian Petroleum Directorate. The trend represents a “considerable challenge for further development on the Norwegian shelf,” it estimates.

Costs in Norway’s oil industry have increased by about 10 percent a year on average over the past decade, according to consulting company Rystad Energy. Drilling expenses in the country exceed levels in neighboring U.K. waters by as much as 45 percent, a government-commissioned report said in 2012.

“We’ve come a long way when it comes to being attractive to the companies that are good at geology,” Lien said, referring to exploration-focused firms. “What we might need to focus on is to become more attractive to the companies that are best at development and production.”

Before it's here, it's on the Bloomberg Terminal.