NORWEGIAN ENERGY: HEADY WITH GAS, BUBBLY WITH OIL

C O N F I D E N T I A L OSLO 001086

SIPDIS

SIPDIS

EUR/NB (MMCDOWELL),DEPARTMENT OF COMMERCE (LMARKOWITZ),
STATE PASS TO USTR, DEPARTMENT OF ENERGY (TSARKUS, JGIOVE),
INR/I (SMCCORMICK); COPENHAGEN FOR ERIK HALL

E.O. 12958: DECL: 10/30/2017
TAGS: ECON EPET ENRG EINV SENV NO
SUBJECT: NORWEGIAN ENERGY: HEADY WITH GAS, BUBBLY WITH OIL
(C-RE7-01822)

REF: OSLO 098

Classified By: DCM Kevin M. Johnson, reasons 1.4 (b) and (d)


1. (C) Summary. In a recent review of energy issues facing
Norway, the third largest exporter of gas and fifth largest
exporter of oil, Petroleum Ministry officials discussed:
--anti-competition concerns raised by the recent merger of
Norwegian state-owned oil companies Statoil and Norsk Hydro;
--the newly-formed company's selection as a stakeholder in
the Shtokman field project and what this might mean for
Norway's relations with Russia;
--StatoilHydro's interests in Iran;
--Norway's 20th licensing round and what is likely to open
when;
--Norway's upcoming shipment of LNG to the U.S.; and
--the GON focus on alternative energy, Norway's Mongstad
carbon sequestration project and a possible domestic energy
crisis stemming from environmental issues.
These issues draw attention to the trouble Norway is having
as it searches for its place in the energy world. End
Summary.

Anti-competition, or a "Bright Future"?
--------------


2. (C) Director Generals Odd Sverre Haraldsen and Ole
Anders Lindseth strongly disagreed that the recent merger
between the Norwegian state-owned oil and gas giants Statoil
and Norsk Hydro would translate into a market monopoly for
the new entity, StatoilHydro. The merged company, of which
the GON holds a 62.5 percent ownership interest, has an 80
percent market share of Norwegian Continental Shelf (NCS)
operatorships. Lindseth argued that the advent of more
interested companies seeking to explore NCS opportunities,
particularly small-and mid-sized businesses, translated into
greater competition for StatoilHydro. He noted that
Norwegian law included a dilution principle so licensees vote
on each proposal, and thus even though StatoilHydro held a
majority share interest, the company would still need to
follow "the will of the majority" as to how it ran its
awarded operatorships. In such instances, he concluded that
size was "not decisive."


3. (C) Lindseth believed that corporate size would be
neither a negative nor positive factor, and that the
capability of a company and ability to effectively handle the
many logistical demands confronted by license holders would
be the key elements judged by Petroleum authorities when
awarding future licenses. He proposed that companies vying
for NCS licenses would actually be facing one less
competitor, given that StatoilHydro would not be receiving
the same number of operatorships and participating shares as
the two member companies prior to the merger. Lindseth
emphasized that there would be "one less competitor" for
rival businesses. (Note: This falls in line with our prior
discussions with StatoilHydro executives, who believed that
the number of future operatorships awarded to the merged
entity would drop, given GON anti-competition concerns). The
Petroleum officials stressed that anti-competition concerns
were discussed by the Norwegian government prior to the
merger, which involved a White Paper and continued
Parliamentarian debate. Both Haraldsen and Lindseth also
pledged that StatoilHydro's market position would be closely
followed. Dismissing all anti-competition concerns, the
officials noted that the future is bright for US companies,
as Norwegian NCS exploration thrives on competition.

4. (C) We also raised anti-competition concerns stemming
from the recent 30 percent GON buy-in of Aker Holding AS,
which holds a 40 percent ownership interest in AkerKvaerner,
the largest equipment supplier to Norway's oil and gas
industry. The 800 million USD investment, slated for
Parliamentary approval by the end of 2007, was publicly
promoted by the government's call to ensure national
ownership in key businesses. (Note: Widespread rumors
further confirmed by Oslo Stock Exchange CEO Landsnes, has
suggested the move was motivated in some part as a way to
forestall foreign, and particularly Russian, investment into
AkerKvaerner. The company's technological expertise in deep
sea, High North exploration would prove valuable in
developing Russia's Arctic energy potential). We brought up


concerns that, from an outsider's perspective, the GON's
ownership in the largest oil and gas company, and the largest
industry supplier, was troubling in terms of controlling
long-term contracts and market access. The officials stated
that US companies should not be concerned of blocked market
access.


5. (C) Lindseth went to great lengths explaining that
Norwegian civil servants could not sit on the board of a
government-owned Norwegian company, which evidenced the GON's
commitment to ensure that "obvious Chinese walls" were
constructed and prevented direct government influence on
GON-owned companies. Despite that statement, we pointed out
a recent letter from US investment firm Fidelity Investments
concerning the removal of Norsk Hydro Chairman Jan Reinas
surrounding an options scandal. The controversy involved the
GON's instruction of Norsk Hydro to end its stock option
program which the Hydro Chair felt the company was legally
obligated to fulfill. Fidelity, a major Norsk Hydro
shareholder, wrote the letter to Norwegian Trade Minister
Andersen, critical of the government's pressure on Reinas.
Essentially, the company expressed concern that the GON
failed to seek a change in the options policy through the
proper corporate governance structures (such as calling an
extraordinary shareholders meeting).

StatoilHydro in Shtokman and Relations with the Russians
-------------- --------------


6. (C) Conversations turned to StatoilHydro's recent
success in securing a 24 percent interest in the Shtokman
Development Company, which is handling Shtokman field's first
development phase. (Note: the field is the largest known
offshore gas field in the world, situated in the Russian
sector of the Barents Sea. Estimates approximately 3.7
trillion cubic meters of natural gas). StatoilHydro's
partners will be Gazprom and Total, holding 51 percent and 25
percent shares, respectively. The first phase is expected to
initially produce approximately 23 bcm of natural gas
annually. Development costs for the first phase range
widely, from 20-30 billion dollars. Phase one would develop
approximately 20 percent of all Shtokman field reserves.


7. (C) Prior to the announcement, Post has been closely
following the contest for Shtokman. Aside from
ConocoPhillips, our discussions with local US oil companies
confirmed that American companies have not been actively
involved in the race for Shtokman involvement. Chevron
expressed initial interest, and withdrew after Gazprom first
decided that it would manage the project without foreign
partners during first Shtokman phase. A local ConocoPhillips
executive previously informed us that the Shtokman deal was
not "financially interesting," but that the company pursued
the matter largely to cement their extensive 14 year
relationship in Russia, as demonstrated by its long-standing
Lukoil relationship. Additionally, ConocoPhillips viewed the
phase one deal as an entree into future, more lucrative
Shtokman phases, involving equity shares, management control
and long-term deals with bigger fields. The local executive
believed that the company's interest evidenced its good-faith
efforts with the Russians. Holding to the proposition that
the deal itself was financially sour, following the
StatoilHydro selection the executive wryly noted that over
the long haul, "we'll see who the real winner is."


8. (C) Lindseth remarked that StatoilHydro likely was chosen
for Shtokman because of its significant expertise in dealing
with extreme Arctic conditions and challenging subsea
production.


9. (C) Immediately following the announcement, a
StatoilHydro executive informed Econ Officer that although
extremely pleased with the award, the company had a "hell of
a job" to do over the next two years, referring to short term
project challenges surrounding the project's magnitude.


10. (C) Discussion moved to Norwegian relations with
Russia, particularly involving the potentially resource-rich
"disputed zone." The zone, approximately 155,000 square
kilometers in size and located in the Barents, has been a
point of contention between both countries for over 30 years.





11. (C) Lindseth said that negotiations were moving
forward. He described how discussion of straddling fields
was a new concept for Russia, but not for Norway (with a
history of dealing with the UK and Denmark). Lindseth, who
noted that there would be new meetings with the Russians
shortly, believed that the Shtokman agreement would possibly
lead to a breakthrough. However, he was quick to point out
that there was no "direct link" between Shtokman and the
disputed zone's resolution. When faced with the fact that
disputed zone negotiations had continued over 30 years, he
shrugged and noted "Maybe next year," stating that "time is
less important than results."

Statoil in Anaran: Business as Usual?
--------------


12. (C) Petroleum Ministry officials did not want to discuss
recent press reports that StatoilHydro is continuing its
development of Iran's Anaran field (see Reftel a),noting
that the U.S. position (and that of the merged company) were
well known to both sides.

The 20th Licensing Round: Prospects?
--------------


13. (C) On the 20th licensing round of NCS development,
Lindseth delivered mixed messages. Norway announced on
October 26 that companies were invited to nominate blocks
which they believe should be included in the round. The GON
will accept proposed license area suggestions (including,
with limitations, the areas in the North, Barents and
Norwegian Sea) submitted by January 15, 2008. Although the
award of new production licenses is slated for the spring of
2009, Lindseth agreed that this was a "moving target," and
that the actual license award date would likely be later.
(Note: the 20th round has already been postponed for a year.
Local representatives of US oil companies, while seeking
certainty from the GON that the awards date will actually be
firmly set, have conceded that as awarded licenses from the
last round have not been fully exploited, given the lack of
oil rigs and extraction material, the GON had a strong
position to demand an extension of the next round's award
date.)


14. (C) Referring to the Soria Moria Declaration, which
outlined the goals of the GON coalition, Haraldsen and
Lindseth pointed out that the Lofoten area would definitely
not be open for licensing. Environmental concerns have closed
access to this presumed gas-rich area, which has a
long-standing fishing tradition. Local representatives of US
oil companies have continuously urged the GON to open up
these promising fields.

Energy, energy everywhere...
--------------


15. (C) With enhanced recovery developments, evidenced in
the massive Ekofisk field, the extent of Norwegian resources
is growing. Ekofisk was slated to close in 1997. Given new
extraction and recovery technologies and methods, the field
is now slated to be closed in 2035. A new resource report
indicates that approximately one/third of NCS energy has yet
to be discovered.


16. (C) The Norwegians noted the importance of the upcoming
first shipment of liquefied natural gas to the U.S. from the
Norwegian Snohvit project. The GON is interested in a
significant opening ceremony, and will contact Post with
their plans. (Note: over one-half of the Snohvit project's
LNG will be destined for Cove Point, Maryland). A June 2009
official opening date was discussed, with the Petroleum
officials pledging to remain in close contact with the USG
concerning a formal, high-level bilateral ceremony.

Renewable Energy, CCS and Who Turned Off the Lights?
-------------- --------------


17. (C) The Norwegian officials stressed the Norwegian
commitment to developing alternative energy, and carbon

capture and sequestration (CCS). Haraldsen described that
the Norwegian alternative energy focus would focus on wind
power, most notably offshore windmills situated in deep
water. The potential from such projects are very high,
despite the current development cost challenges.


18. (C) Haraldsen then discussed the Mongstad CCS project,
which would involve massive carbon sequestration from gas.
Haraldsen acknowledged Ambassador Whitney's recent meeting
with then-Petroleum Minister Roger Enoksen to support the
FutureGen project, a CCS initiative involving coal
sequestration, and pledged a forthcoming answer from the
Norwegian government. Haraldsen noted that the carbon
sequestration posed serious technological challenges. The
Norwegians discovered from their Sleipner project (where CO2
was extracted from natural gas itself) that carbon dioxide's
high corrosive nature played a major challenge. Haraldsen
also recognized Norway and U.S. cooperation on the Carbon
Sequestration Leadership Forum. He also pointed out the need
to jointly work to get the public behind CCS, citing the
"unfounded" fears that CO2 would leak out of sealed
reservoirs. Haraldsen reiterated that Norway's goal was to
commercialize, and industrialize, the CCS process.


19. (C) Subsequent to the meeting, it was reported that
Norway (a member of the European Economic Area) has not yet
won the requisite EU clearance for the Mongstad project,
given that the GON's planned state sponsorship of the
environmental measure is believed to breach EU subsidy
regulations. Petroleum Minister Haga noted to press that the
move may delay Mongstad's development.


20. (C) The GON commitment to CCS and alternative energy is
causing the government to face a potentially serious domestic
energy challenge. Press reports indicate that Petroleum
Minister Haga may oppose the operation of mobile gas-fired
power stations at Nyhamna and Tjeldbergodden (central
Norway),even though the projects are already in the
development phase. The projects were supposed to be
temporary fixes to address large industrial consumption of
energy, most notably involving the massive Ormen Lange gas
project (which will supply a substantial amount of U.K. gas
needs). Norwegian power companies, often owned by
municipalities, have sold energy to industrial clients at the
expense of consumer needs. Minister Haga is concerned that
the temporary mobile stations do not utilize clean
technologies, and present only a short-term solution. There
is widespread concern that shutting down the mobile stations
will lead to power blackouts and energy rationing.

The Uncertain Road Ahead: Russian Adventures and Energy
Shortages?
-------------- --------------


21. (C) Comment. Norway, the third largest global exporter
of gas, and fifth largest oil exporter, is facing great
challenges as it searches for its place in the world. In
practice, the highly transparent Norway has fairly dealt with
the conundrum of encouraging NCS competition, despite the
state ownership of Norsk Hydro and Statoil. Nevertheless,
with the mega merger and creation of StatoilHydro, and the
GON buy-in of energy supplier giant AkerKvaerner, careful
scrutiny will be needed to see if the tradition of open, fair
competition continues. The impression that the Norwegian
government now sits on all sides of the energy table is a
difficult image to ignore. StatoilHydro's success with
Shtokman, and its impact on Russian relations (including a
possible resolution of the disputed zone),is also of great
interest. Lindseth revealed much stating that Norway must
focus on a commercial relationship with Russia, and that
aggressive Russian tendencies to break and restructure energy
contracts (as with the Sakhalin development) were of a thing
in the past, and occurred when Russia had a "lousy" deal (as
opposed to Shtokman). Even if the Shtokman deal is more fair
to Russia than other past energy opportunities, an overt GON
reliance on present Russian contractual guarantees is unwise,
if not naive.


22. (C) Finally, Norway must get its own house in order
concerning CCS and domestic energy needs. Possible EU
rejection of Norway's marquee Mongstad CCS project, on top of


the very real possibility that the energy-rich country could
suffer blackouts due to unsound policy, will pose great
challenges ahead. The overall impact of these commercial
deals on Norway's foreign policy is also a question of
concern.
JOHNSON