The Government Oil Play
Christopher Helman with Emily Schmall
National governments are hogging 70% of the world’s most accessible petroleum. You can get a piece of the action by buying shares of companies like Statoil.
The Jack 2 Well drilled in the deep waters of the Gulf of Mexico in 2006 was heralded as opening up 15 billion barrels of untouched oil reserves. Do you want a piece of it? You could buy into Chevron or Devon Energy, partners in the project. Or you could buy shares in a mostly government owned oil company that is also participating, the Norwegian firm StatoilHydro.
Øivind Reinertsen, who runs operations in the gulf for StatoilHydro, hastens to dampen expectations. “There’s a lot of oil there, but nobody talks about the cost. If we started today without developing new technology, the economics would not be robust even at today’s oil prices,” he says. Even so, StatoilHydro looks intriguing. It’s making good money off oil projects that are already pumping: $8.7 billion last year, or $2.70 per ADR. Of that, $5.3 billion was paid out in dividends, for a 4.5% yield on the recent $39 share price.
It costs $200 million to drill and complete a single well at Jack’s 30,000-foot depths. But StatoilHydro is dedicated to the gulf. It has invested $8.5 billion there over six years. Reinertsen expects to drill 25 new wells by 2012.
StatoilHydro was formed last October in the merger of Norway’s biggest company, Statoil, with the oil and gas operations of Norsk Hydro. Norway’s $400 billion state pension fund owns 63% of the company’s shares. With $102 billion in combined annual sales, Statoil- Hydro is among the world’s ten largest publicly traded oil companies.
National oil companies hold more than 70% of the world’s easily recovered oil and natural gas. But you can’t buy shares in 100% state-owned giants like Saudi Aramco, Petróleos Mexicanos (Pemex), or Petróleos de Venezuela. StatoilHydro is one of a handful of hybrid state-controlled oil companies ( see table) in which you can.
These hybrids are decent investments for outsiders. They enjoy preferential access to large, low-cost reserves at home. By dint of being listed on international exchanges, they have some motivation to be transparent to outside shareholders. That said, “Gazprom is a direct instrument of Russian state policy, while the Chinese [PetroChina and Cnooc] are just a shambles, with the government telling them what to do,” says Charles Maxwell, oil analyst with Weeden & Co. Still, Maxwell believes that over time access to resources will compensate investors throwing in with autocrats.
StatoilHydro’s political risk is low. Unlike the backlash that China’s Cnooc got in 2005 when it attempted to buy the California firm Unocal, the Norwegians haven’t elicited a peep from U.S. politicians for their viking thrust into the Gulf of Mexico. “I don’t think Congress would have been upset if it was Statoil that bought Unocal,” says Reinertsen.
The company gets 80% of its 1.9 million barrels of daily production from home waters. The rest comes from spots like Azerbaijan, Angola, Algeria and Iran, where it weathered a bribery scandal in 2004 and is developing the giant South Pars gas field. Next year it will drill for oil in Cuba, 50 miles from Key West, with Spain’s Repsol and India’s 74%-state-owned Oil & Natural Gas Co.
U.S. oil companies aren’t allowed to operate in Cuba or Iran and have had a hard time cracking Russia, too. But earlier this year Gazprom finalized a deal with StatoilHydro and France’s Total to develop the Shtokman field’s 130 trillion cubic feet of gas under the icy Barents Sea. “We have a very close relationship with national oil companies around the world,” says StatoilHydro Chief Executive Helge Lund. In Venezuela, where ExxonMobil is deep in a legal fight over confiscated projects, Lund reportedly negotiated $230 million in compensation for an expropriated field and signed a new development deal.
Charles Ober, manager of the T. Rowe Price New Era Fund, likes StatoilHydro—and also Petróleo Brasileiro (Petrobras), which has recently found what could amount to 30 billion barrels of oil in the Tupi and Carioca discoveries off the shore of Brazil. The two companies have a technology-sharing alliance, a pact to cooperate on biofuels development and joint ventures to develop offshore fields. In March the Norwegians acquired from Anadarko Petroleum the remaining 50% it didn’t own in an offshore Brazilian field called Peregrino.
Petrobras has great growth potential, with one caveat. Elizabeth Collins, an analyst at Morningstar, points out that Petrobras, which is 32% government-owned, has a mandate to help keep petroleum affordable for Brazilians, so the company’s profits won’t be as high as if Brazil let prices float freely.
StatoilHydro and Petrobras are both working the diplomatic shoe leather to get on better terms with Pemex, a state-owned oil company famous for politics and ineptitude. Mexico’s constitution bars non-Mexicans from owning its oil. But with output declining, Pemex hopes to find some way to bring in foreign capital and expertise. The presidents of Mexico and Brazil have discussed Petrobras and Pemex’s jointly exploring Mexico’s technically challenging deepwater fields.
It’s something StatoilHydro would like to get in on. Last year it initiated a project to cut natural gas flaring at Pemex’s Tres Hermanos field, using StatoilHydro technology to capture the gas and bring it to market. In a nice twist, StatoilHydro gains emissions-reduction credits it can apply to other efforts worldwide.
A bigger idea: Reinertsen foresees a time when StatoilHydro could help Pemex recover oil from the middle of the gulf, where the Norwegians have leased exploration blocks nearly flush with the U.S.-Mexico maritime border. Pipeline infrastructure already reaches nearly that far from the U.S. coast. Deepwater wells could be drilled in Mexican waters and their output tied in with the subsea pipelines on the U.S. side. Says Reinertsen: “A part of being a small country with few people is that you have to look for these possibilities. And when you find them, you grab them.”
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