From: <a href="http://www.aftenposten.no/spesial/wikileaksdokumenter/article3958592.ece">Aftenposten</a><br>
Date: 06.03.2008: 
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2008-03-06 14:02 
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
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