Comments: Norway's New Company

Abstract

The announcement that Norway's largest operators, Statoil and Hydro, plan to merge has set off speculation that the industry could be on the threshold of another wave of consolidation, particularly if oil prices continue to slide from their recent lofty levels. But it also raises questions about whether the argument for consolidation has changed from just a few years ago in an industry facing a future of scarce talent and difficult-to-exploit resources. The last big round of mergers among operators began in the late 1990s, when low oil prices appeared to be the driving force behind moves to cut costs through synergies. BP swallowed Arco and Amoco, and Exxon took over Mobil. Others followed to compete in the new environment of "supermajors." A Statoil-Hydro consolidation had been anticipated before, and the announcement met with quick approval from the Norwegian government, which has sizable stakes in both companies. Essentially, Statoil is buying Hydro's upstream oil and gas business for U.S. $30 billion. The new company, which eventually will assume a new name, will be the biggest offshore operator in the world and one of the largest operators in terms of market capitalization, behind such behemoths as ExxonMobil, BP, Shell, Chevron, Total, Eni, and PetroChina. It will have production of approximately 1.8 million BOEPD and proven reserves of 6.3 billion BOE. Statoil shareholders will hold two-thirds of the new entity, and Hydro shareholders will possess a third. Hydro will continue to operate its aluminum business separately. The Norwegian government wants a 67% stake in the new company and is already proclaiming the result of the merger as Norway's national energy company. On the surface, Statoil and Hydro seem to have natural synergies; the two companies are currently involved in numerous upstream projects together. But cost cutting does not appear to be the reason for the move, and, in fact, company officials have pointed out that they expect staff redundancies to be few and handled largely through natural turnover. The driving force seems to be the new energy landscape of intense competition for scarce technical talent and hydrocarbon resources. Instead of trying to cut talent, companies are now desperate for it and, in the case of Statoil and Hydro, see no reason for competing with one another for Norway's best and brightest. And, instead of just looking at the bottom line, companies realize they need growth to meet what appears to be an almost insatiable appetite for energy in both the developed and developing world. The future of consolidation may hinge on these issues, rather than opportunities for costs savings. Statoil-Hydro certainly will be a force to reckon with in the Gulf of Mexico (GOM). The two companies have bought approximately $6 billion in GOM assets in the past 2 years. The new company would be by far the largest offshore operator, and both have had a solid reputation as adopters of cutting-edge upstream technology, so there is no reason to think the combined company would not be looking for more acreage offshore. As is the case in many developed upstream regions, Norway's resources are declining, and its energy companies are increasingly looking elsewhere for supplies. Competition has increased for hydrocarbons, not only from the larger international oil companies but also from the more aggressive and nimble national oil companies, and resources are in fields more difficult to exploit. Operators have been straining to increase output and add to reserves in the face of this new competition as well as stricter access to oil and gas fields. The recent pressure that private companies have come under in countries such as Russia and Venezuela only heightens the concern.