Statoil ASA (STO) and Russian state-owned oil company OAO Rosneft have entered into an agreement by which the Norwegian oil giant will jointly explore and develop Russian offshore deposits in the Barents Sea and Sea of Okhotsk. The venture is expected to involve an investment of approximately $100 billion over decades.
The agreement calls for the exploration of the Perseevsky licence in the Russian part of the central Barents Sea and three licenses — the Kashevarovsky, Lisyansky and Magadan-1 — north of Sakhalin island in the Sea of Okhotsk. Both parties intend to jointly explore, with Statoil holding 33.33% in each activity.
Statoil intends to finance the initial exploration initiatives of the four licenses, covering more than 100,000 square kilometers of area, in order to validate the commercial viability. Importantly, the deal also enables the duo to conduct joint technical studies on two onshore Russian assets — West Siberia’s North-Komsomolskoye field and the Stavropol shale oil play in south-west Russia.
Russia, with a daily output of more than 10 million barrels of oil, holds the world’s top position. The Artic region, by itself, is expected to have a reserve potential of 51 billion tons of oil, enough to cover the worldwide oil demand for four years or more. Consequently, the deal enables Statoil to strengthen its position in the Russian hydrocarbon reserve. The pact also grants Rosneft the right to gain shares in Statoil’s exploration licenses and properties in the North Sea along with the Norwegian zone of the Barents Sea.
The latest deal follows similar accords that Rosneft struck with Italy's Eni SpA (E) and U.S. energy behemoth ExxonMobil Corporation (XOM) for the exploration of oil in Russia's Arctic. Lately, Russia has been facing production declines at its traditional oil regions, and is wooing Western energy companies with money and expertise to develop the largely untapped Arctic offshore resources.
In the wake of a surge in global oil demand, we see the Norwegian oil major as benefiting from this cooperation alliance with the world’s largest hydrocarbon-producing nation. The pact will aid Rosneft in extracting heavy oil in Siberia and shale oil in Stavropol, in southern Russia through the application of Statoil’s expertise and experience from developing unconventional hydrocarbon resources in the U.S., Norway and Brazil.
Although Statoil’s partnership in a multibillion-dollar development program in the Gazprom-led Shtokman gasfield in the Barents Sea with Rosneft has been delayed due to Russia’s tax regime, the recently announced tax structuring has made it easier for foreign investment in Russia's high-risk Arctic play.
We remain upbeat on Statoil’s upstream initiatives that remain on track to achieve 4.2 billion barrels of oil in the coming years with an oil recovery rate of 50% by 2020. Significant discoveries in the mature North Sea as well as in the Barents Sea also reaffirm the potential of the Norwegian Continental Shelf.
We maintain our long term Neutral recommendation for Statoil, which retains a Zacks #3 Rank (short-term Hold rating).
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