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Cablegate: Norway´S Energy Part I: Rough Waters Ahead for Statoilhydro

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RR RUEHWEB

DE RUEHNY #0126/01 0661311
ZNR UUUUU ZZH
R 061311Z MAR 08
FM AMEMBASSY OSLO
TO RUEHC/SECSTATE WASHDC 6666
INFO RUEHCV/AMEMBASSY CARACAS 0083
RUEHMO/AMEMBASSY MOSCOW 3986
RUEHOT/AMEMBASSY OTTAWA 3060
RUEHBS/USEU BRUSSELS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS OSLO 000126
SIPDIS
SENSITIVE
SIPDIS
EUR/NB (MMCDOWELL), DEPARTMENT OF COMMERCE (LMARKOWITZ), DEPARTMENT OF ENERGY (EROSSI,TSARKUS, JGIOVE), INR/I (SMCCORMICK); COPENHAGEN FOR ERIK HALL
E.O. 12958: N/A
TAGS: ECON ENRG EPET PGOV SENV NO
SUBJECT: NORWAY´S ENERGY PART I: ROUGH WATERS AHEAD FOR STATOILHYDRO

1.(U) Summary: In this three part series, we look at Norway´s
energy sector. Norway is the world´s fifth largest oil
exporter and the third largest gas exporter. StatoilHydro,
the new Norwegian national energy champion, is a Fortune 50
company with worldwide production and export of oil and gas
resources. StatoilHydro finished 2007 in a burst of
optimism, completing the merger of Statoil and Norsk Hydro in
October of 2007 with remarkable speed, riding a wave of high
oil prices, and winning a 24% share in the Shtockman gas
field. However, 2008 is off to a rough beginning for the new
company, with declining projections of oil production,
problems with their prestige LNG project, Snohvit, and
pressure from the new Environment Minister, all while
smoothing out the wrinkles of the merger and appointing new
leadership. End Summary

Oil Shifting to Gas
---------------

2.(U) Norway,s energy sector is transitioning from oil to
gas, as oil production on the Norwegian continental shelf
continues to fall. No major oil fields have been discovered
in the past ten years and recently revised estimates indicate
that oil production will soon begin its long-expected decline
sooner and sharper than previously predicted. StatoilHydro
is no exception to this trend and has adapted a multifaceted
strategy to adapt, including investments abroad (in Canadian
oil sands, Gulf of Mexico, Africa etc), shifting to gas
production, ncluding LNG, and pushing for looser
environmentl restrictions in the remaining areas in Norway
hich have been closed to exploration. All of thes
strategies have promise but so far 2008 has highlighted the
problems inherent in each.

Internaional Investments Putting StatoilHydro on the
Enironmental Blacklist?
--------------------------------------------

3.(U) StatoilHydro has investents in 31 nations including
difficult countries suc as Iran, Venezuela and Libya.
Corruption hasbeen a problem for the company in some
countries, most forcibly demonstrated by the forced
resignation of former Norsk Hydr boss Eivind Reitan
(previously slated to take oer as chairman of StatoilHydro)
over a bribery sandal in Libya. These issues are common to
mostinternational energy companies but StatoilHydro faces
the additional challenge of maintaining an envronmentally
friendly image.

4.(SBU) Events inlate 2007 and early 2008 have forced
StatoilHydr to dfend its environmental commitment to both
ublic and governmental critics. Public concern ovr an oil
leak from a subsea pipe late in 2007 (cused by a ship´s
anchor) foreshadowed the criticsm facing the company in
early 2008. Environmenal Minister Erik Solheim (also
Development Miniser and an influential member of Government)
recenly attacked StatoilHydro for investing in the
enironmentally damaging Canadian oil sands and for lbbying
the government to open previously closed nvironmentally
sensitive areasof the Norwegian Continental Shelf for
exploration. Solheim expressed surprise and concern that the
majority state-owned company was pushing the government to
adapt environmentally unfriendly policies and was investing
in environmentally harmful projects. StatoilHydro CEO Helge
Lund reacted strongly to this criticism saying that it was
the company,s &democratic right8 to express its opinions
and that he could not accept Solheim,s attempt to silence
the company. Oil and Energy Minister Aslaug Haga supported
Lund but denied that there was disagreement in the
government. Comment: Solheim,s citing of state ownership
was interesting given the GON,s regular claim that the GON
does not interfere in state-owned companies decisions, for
example when pressed to end StatoilHydro,s investment in
Iran.

Fairest of them all? Questions about Snow White
--------------------------------------------- ---

5.(U) Expected to be StatoilHydro,s flagship project for the
next generation, the LNG plant Snohvit (Norwegian for Snow
White) located in Hammerfest, has run into severe problems
since operations began in August. The brand new facility
will only reach a maximum of 60% of expected productivity in
2008 due to problems with a cooling tower that may need to be
redesigned and rebuilt. This comes after a delay of one year
in construction, a 50% increase in cost and a two month
closure in December and January due to salt water leakage in
the plant,s piping. In addition the projected CO2
emissions from the plant are much higher than expected,
further tarnishing the company,s environmental credentials
(and damaging the GON,s plans to become carbon neutral).
CEO Helge Lund was recently forced to admit that he did not
know the reason for the delays in getting Snohvit fully
online, earning him the derisive media nickname, "Mr. Know
Nothing". One bit of good news is that the first shipment of
LNG from Snohvit to the U.S. (to Cove Point, MD) was
delivered on February 21.

New Leadership and the Outlook for the Future
-------------------------------------------

6. (SBU) Despite these challenges StatoilHydro,s leadership
remains optimistic. In a talk January 9 with London
financiers StatoilHydro,s CEO Helge Lund acknowledged
problems with production but pointed to greater than expected
synergies from the merger (savings of over $1 billion per
year), the promise of new areas of long-term growth (Gulf of
Mexico, Canada oil sands and most importantly Shtockman) and
actual growth in international production as good news.
Certainly if StatoilHydro is able to book the Shtockman field
reserves it will help offset some of the setbacks. However it
is still unclear what price StatoilHydro paid for its stake
in Shtockman or when the project could be expected to move
forward. Lund along with newly appointed Chairman Svein
Rennemo (previously CEO of Geo-Services ASA) have their share
of challenges for the coming year. How the company performs
and how the GON interacts on controversial issues will be a
strong indicator of both the viability of the company and the
GON´s policy towards state-owned companies. Early signs are
not promising with the latest corporate quarterly earnings
report indicating falling earnings despite a sharp increase
in energy production (which company execs attribute to
increased operating/development costs).
WHITNEY

© Scoop Media

 
 
 
 
 
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