Identifier
Created
Classification
Origin
08OSLO128
2008-03-06 14:02:00
CONFIDENTIAL
Embassy Oslo
Cable title:  

NORWAY'S ENERGY PART II: STATOILHYDRO'S SAGA FROM

Tags:  ECON ENRG EPET PGOV SENV NO 
pdf how-to read a cable
VZCZCXYZ2586
PP RUEHWEB

DE RUEHNY #0128/01 0661402
ZNY CCCCC ZZH
P 061402Z MAR 08
FM AMEMBASSY OSLO
TO RUEHC/SECSTATE WASHDC PRIORITY 6669
INFO RUEHCV/AMEMBASSY CARACAS PRIORITY 0085
RUEHMO/AMEMBASSY MOSCOW PRIORITY 3988
RUEHOT/AMEMBASSY OTTAWA PRIORITY 3062
RUEHBS/USEU BRUSSELS PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
C O N F I D E N T I A L OSLO 000128 

SIPDIS

SIPDIS

EUR/NB (MMCDOWELL),DEPARTMENT OF COMMERCE (LMARKOWITZ),
DEPARTMENT OF ENERGY (EROSSI,TSARKUS,JGIOVE),INR/I
(SMCCORMICK),EEB/ESC (LWRIGHT); COPENHAGEN FOR ERIK HALL

E.O. 12958: DECL: 03/06/2018
TAGS: ECON ENRG EPET PGOV SENV NO
SUBJECT: NORWAY'S ENERGY PART II: STATOILHYDRO'S SAGA FROM
A BUSINESS PERSPECTIVE

REF: OSLO 126

Classified By: DCM Kevin M. Johnson, Reasons 1.4 (b) and (d)
C O N F I D E N T I A L OSLO 000128

SIPDIS

SIPDIS

EUR/NB (MMCDOWELL),DEPARTMENT OF COMMERCE (LMARKOWITZ),
DEPARTMENT OF ENERGY (EROSSI,TSARKUS,JGIOVE),INR/I
(SMCCORMICK),EEB/ESC (LWRIGHT); COPENHAGEN FOR ERIK HALL

E.O. 12958: DECL: 03/06/2018
TAGS: ECON ENRG EPET PGOV SENV NO
SUBJECT: NORWAY'S ENERGY PART II: STATOILHYDRO'S SAGA FROM
A BUSINESS PERSPECTIVE

REF: OSLO 126

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

1.(C) Summary. StatoilHydro, despite suffering from massive
growing pains following the recent merger of Statoil and
Norsk Hydro, maintains that its ambitious global expansion is
on track. The company will continue existing Iranian
operations, eyes Caspian energy with interest, and soberly
views its Shtokman venture (doubting the aggressive Russian
scheduled on-line dates),all while contending with growing
domestic political criticism. Energy producer rivals and
sector suppliers criticize the company as being
directionless, and paying inadequate attention to existing
Norwegian Continental Shelf (NCS) operations (including
setbacks with the Snohvit project). Suppliers are wary of
StatoilHydro's NCS dominance, fearing anti-competition
concerns. End Summary

A Giant Finding its Way: The First 100 Days, and Beyond
--------------

2.(C) The StatoilHydro merger in October 2007 created a
massive Fortune 50 company, holding approximately 80% of NCS
operatorships. Growing pains are evident, as revealed in
recent meetings with senior StatoilHydro executives. The
challenges of the megamerger are startling: during the first
100 days, over 10,000 new on-shore positions were created.
The company will only now tackle sifting through the
off-shore positions. While trumpeting many impressive
statistics (including being the largest off-shore company in
the world, large-scale expansion into the Gulf of Mexico and
winning 16 leases in the Chukchi Sea, located offshore
Alaska),the company has faced many setbacks in Norwegian and
international operations. (Reftel A).

Iran: The Beat Goes On...and On
--------------

3.(C) StatoilHydro executives confirmed that the company
will continue development of Iran's Anaran field. They

stressed that StatoilHydro's position should be "no surprise"
to the USG: the company will not expand operations, and will
only continue its prior contractual obligations. One
executive remarked that the "business climate in Iran has
been less than inviting," noting massive bureaucratic issues.
The executive noted that Iran cannot launch one LNG project,
and cited declining production. Despite having the second
largest gas reserves in the world, another executive noted
wryly that Iran is becoming an importer rather than a net
exporter.

Russian Challenges, New Time Frames
--------------

4.(C) Discussions with StatoilHydro moved to the massive
Shtokman project, focusing on the company's 24 percent
interest in the Shtokman Development Company, which is
handling Shtokman field's first development phase. (Note:
the Shtokman field is the largest known offshore gas field in
the world, situated in the Russian sector of the Barents Sea.
Estimates indicate approximately 3.7 trillion cubic meters
of natural gas reserves). StatoilHydro's partners are
Gazprom and Total, holding 51 percent and 25 percent shares,
respectively.

5.(C) 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. StatoilHydro gas experts noted
that the project is a technological marvel, which will
necessitate breaking 250 world records. Distances are so
great that three refueling helipads must be placed along the
way to the main site. (Note: official figures indicate an
aggressive 2012 opening date. Company experts inadvertently
presented an internal PowerPoint slide which indicated a 2016
start date).

6.(C) Statoil experts believe development of Yamal resources
(although Statoil is not directly involved) present massive

logistic and infrastructure challenges (including lack of
railways, pipelines, and living quarters),but the
StatoilHydro executives believe that the project will come
on-line in 2014 not the Russian estimated 2012 commencement
date. The Norwegians emphasized that the Russian estimates
for both Shtokman and Yamal are unrealistic.

Environmental Concerns; Politicians, Publc Attack Corporate
"Klima-Monster"?
--------------

7.(C) StatoilHydro will continue its carbon capture
sequestration (CCS) efforts, including the costly,
technologically-challenging (and politically important)
Mongstad project. Although its CCS efforts receive high
praise internationally, company executives frankly say that
price considerations (including the GON's hefty carbon
dioxide taxes) motivate projects like Mongstad. (Note:
StatoilHydro executives downplayed previous concerns that the
European Union was balking at approving the project due to
the amount of government funding involved). The StatoilHydro
team dismissed GON politicians who publicly set a Mongstad
opening date of 2014, shrugging off political influences,
stating that projects only move forward if they make business
sense.

8.(C) The company's investments in Canadian tar sands
projects raised public outcry from Environment and
International Development Minister Erik Solheim. Solheim's
public attack of the company, noting the environmental
consequences of the project, were privately brushed aside by
the corporate executives. These officials informed EconOff
that the Canadian investment was a good business decision,
and that political decisions must be separated from the GON's
ownership interests. One executive admitted that the public
debate placed the company "in the storm's eye," but held
that business considerations would ultimately control any
investment decision.

Norwegian Gas and Europe, Caspian Resources
--------------

9.(C) The StatoilHydro team discussed gas supply to Europe,
noting that Norway currently supplies 85-90 billion cubic
meters (bcm) per year. By 2020, they estimated that 120-140
bcm of gas will be supplied by Norway, due to successes from
ongoing explorations and estimates of yet-discovered fields
(Note: these estimates do note include the resources of the
Nordland VI and VII fields, located in the Barents Sea off
the Lofoten Islands, which are widely believed to hold vast
gas resources. The current Norwegian government, facing
elections in 2009, has declared those fields off-limits, due
to various environmental and fishing concerns.) These
estimates also consider "de-bottlenecking," where certain
pipeline capacity will be freed due to other declining
fields, and the construction of new pipeline infrastructures,
as in the Norwegian Sea. Unless there are new discoveries,
no additional Norwegian pipelines will be constructed (Note:
if Nordland VI and VII open, a new pipeline will be needed,
given that high carbon dioxide costs will make LNG
cost-prohibitive.)

10.(C) Raising Caspian resources, company executives
discussed the Shah Deniz gas project, and branded the Caspian
an "interesting" area. The team discussed StatoilHydro's
partnering with Swiss EGL in construction of a $2.18 billion
Trans Adriatic Pipeline across the Adriatic Sea. Candidly,
they do not believe that the Nabucco and South Stream
pipeline projects could co-exist, while also doubting
projects requiring future cooperation among Azerbaijan,
Turkmenistan, Kazakhstan, Georgia and Turkey--who "rarely
agree on anything." All the executives praised USG active
diplomatic efforts in the region, which was credited in
freeing access to gas reserves.

StatoilHydro: Rivals, Suppliers Criticize New Kid On The Block
--------------

11.(C) Meetings with leading American energy industry
suppliers and major energy producers note a marked change in
business climate following the Statoil and Norsk Hydro


merger. American energy suppliers were candid, saying that
the merger evidenced the GON's shocking lack of
technical/financial expertise, and argued that direct
competition would benefit the GON-controlled mega-giant.
Concerned that the StatoilHydro market dominance would be
used to squeeze suppliers into less-than-lucrative contracts,
executives are suspicious of proposed standardized
StatoilHydro contracts with non-negotiable terms and
conditions. A country manager remarked that suppliers must
"win one of these giant StatoilHydro contracts, or
disappear." (Note: Despite criticisms, country managers note
that the StatoilHydro procurement wing has invited suppliers
to advise/comment on contract standardization.)

12.(C) Energy producers were also highly critical. One
manager suggested that StatoilHydro should release some of
its NCS operatorships to smaller, leaner companies willing to
make more mature fields even more attractive. Another
criticism from a country manager was that the company cannot
be "everything for everyone." Though growing exponentially,
there was doubt that a grand corporate strategy existed, as
many NCS projects where StatoilHydro served as operator were
arguably getting neglected. Rivals argued that these
operatorships should be sold to companies willing to make
them more efficient, which would not force the company to
replace valuable booked reserves. (Note: Norwegian Petroleum
Directorate officials informed Econoff that "many eyes" are
on StatoilHydro, and that the company will be monitored to
deliver on their existing obligations.) Finally, access to
the NCS, given StatoilHydro's operatorship dominance,
continues to raise alarms from oil/gas operators.

Growing Pains: Reaching Adulthood Too Fast
--------------

13.(C) Comment. Becoming an international energy player
necessarily involves risks, tempering rewards with burdens.
StatoilHydro's global designs are indeed ambitious, spanning
the deep Gulf of Mexico to the frigid northern expanses of
the Barents. But finding one's way in the world takes on
added meaning when new projects demand additional resources
and contending with new responsibilities, which the
beleaguered company now must confront. At home, private
sector rivals and suppliers criticize the giant for expanding
too fast, while neglecting its core --NCS development and its
countless operatorships. Faced with technological setbacks
at its marquee LNG project, Snoehvit, in addition to serious
political pressures over the company's
environmentally-challenged Canadian operations, the company
is facing sharp domestic criticism. StatoilHydro's Iranian
presence, Caspian projects and Russian adventures seem like
daunting challenges for a company perhaps stretched too thin.
End Comment.






WHITNEY